THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

GIFT 


From  the  Library  of 

Henry  Goldman,  Ph.D. 

1886-1972 


The  Pitfalls  of 
Speculation 


BY 

Thomas  Gibson 

Author  "Cycles  of  Speculation,"  etc. 


Published  by 

Moody's  Magazine 

35  Nassau  Street,  New  York 
19  0  8 


Copyright  1908  by 
THOMAS  GIBSON 
All  rights  reserved 


CONTENTS 


Chapter                                                          Page 
I.     Introduction 5 

II.  Ignorance,    Over-Speculation,   etc  15 

III.  Manipulation 23 

IV.  Accidents    33 

V.  Business  Methods  in  Speculation.  41 

VI.     Market  Technicalities • 51 

VII.     Tips  67 

VIII.     Mechanical  Speculation 77 

IX.     Short  Selling 91 

X.     What    500    Speculative    Accounts 

Showed    • Id 

XI.     Grain   Speculation 113 

XII.     Suggestions     As     To     Intelligent 

Methods    • . ,   125 

XIII.     Conclusion   141 


"  So  great  are  the  opportunities  offered 
by  speculative  changes,  that,  with  proper 
methods  and  self  control,  the  poor  man 
cannot  afford  to  overlook  them." 


Introduction 
The  Public  Attitude  Toward  Speculation 

THE  public  attitude  toward  speculation  is 
generally  hostile.  Even  those  who  ven- 
ture frequently  are  prone  to  speak  dis- 
couragingly  of  speculative  possibilities,  and  to 
point  warningly  to  the  fact  that  an  overwhelm- 
ing majority  of  speculative  commitments  result 
in  loss,  while  those  who  venture  not  at  all,  and 
consequently  are  incompetent  to  judge,  dismiss 
the  subject  with  the  statement  that  marginal 
trading  is  gambling,  pure  and  simple,  and  is 
therefore  pernicious. 

Those  who  enter  into  the  subject  a  little 
farther,  and  attempt  to  adduce  more  specific 
argument  against  speculative  possibilities,  lay 
stress  upon  the  statement  that  manipulation, 
trickery  and  wholesale  deception  render  it 
impossible  for  the  outsider  to  enter  the 
field  safely  or  intelligently.  These  statements, 
usually    unsupported,    and    frequently    insup- 


6    THE  PITFALLS  OF  SPECULATION 

portable,  are  accepted  by  the  prejudiced  mul- 
titude as  gospel  truth,  without  any  attempt 
being  made  to  examine  their  foundation  or  cor- 
rectness. 

So  far  as  the  question  of  gambling  is  con- 
cerned, it  would  be  entering  a  very  large  field 
to  attempt  to  define  just  what  is  and  what  is 
not  gambling. 

The  idea  that  the  man  who  buys  a  certain 
stock  outright  invests,  while  he  who  buys  on 
margin  gambles,  is  a  popular  fallacy.  The 
speculator  purchases  in  the  hope  of  an  advance, 
and  if  two  purchases  are  made  for  parallel 
reasons,  one  for  cash,  and  one  on  margins,  both 
purchases  are  speculative. 

That  speculative  fluctuations  are  largely 
used  as  a  basis  for  gambling  operations,  is  un- 
questionably true,  and  possibly  an  acceptable 
dividing  line  may  be  drawn  on  the  following 
hypothesis:  gambling,  in  the  general  accept- 
ance of  the  term,  is  founded  upon  blind  chance, 
the  equal  possibility  of  certain  events  occurring 
or  not  occurring ;  this  is  modified  in  some  cases 
by  the  exercise  of  superior  skill  in  such  games 
as  admit  of  skill ;  but  fundamentally,  gambling 
is  wholly  dependent  upon  the  equal  chances  of 
two  or  more  opposed  individuals. 

The   trader,   therefore,   who   takes   "flyers" 


ATTITUDE  TOWARD   SPECULATION       7 

with  no  knowledge  of  his  subject,  or  the  prop- 
erties in  which  he  deals,  merely  gambles  on  the 
ultimate  rise  and  fall  of  the  market;  but  the 
trader,  who,  after  careful  investigation  and 
study,  purchases  a  property,  either  outright  or 
on  margins,  because  he  has  reasons  for  be- 
lieving it  to  be  cheap,  and  that  it  will  enhance 
in  value,  is  a  speculator. 

Those  composing  the  gambling  element  are 
in  the  majority,  and  it  is  needless  to  say,  are 
the  greatest  losers;  in  fact  their  losses  foot  up 
almost  the  sum  total  of  speculative  deficiency, 
and  consequently  the  sum  total  of  the  gains 
reaped  by  the  real  speculator. 

The  statement  that  most  public  commit- 
ments are  made  on  no  better  foundation  than 
a  mere  guess,  may  seem  a  trifle  bold,  and  the 
counter  statement  may  be  made  that  few 
people  purchase  a  stock  without  some  reason 
for  so  doing.  This  is  admitted  on  the  same 
basis  that  the  man  who  bets  on  a  certain  num- 
ber at  roulette  because  it  has  not  recently  ap- 
peared, or  in  hope  of  an  immediate  repetition, 
considers  that  he  has  a  reason  for  his  action. 
Thus  a  great  number  of  amateur,  or  semi- 
professional  traders,  buy  a  certain  commodity 
for  no  better  reason  than  that  the  stock  has 
declined,  or,  more  frequently,  from  a  partici- 


8        THE  PITFALLS  OF  SPECULATION 

pation  in  a  period  of  speculative  intoxication. 
They  can  give  reasons  for  their  ventures,  but 
they  are  without  foundation,  and  are  no  more 
worthy  of  consideration  than  the  reasons  given 
by  the  roulette  player  for  "staking"  upon  a 
certain  number. 

On  the  other  hand,  the  speculator,  with  a 
carefully  acquired  knowledge  of  the  normal 
value  of  certain  properties,  fully  posted  on 
conditions  in  general,  and  those  affecting,  or 
liable  to  affect  his  favorite  property  in  par- 
ticular, patiently  waits  the  opportunity  to  buy, 
not  at  a  normal  price,  but  at  a  price  far  below 
the  actual  value  of  his  property.  He  knows 
that  speculative  prices  move  in  cycles,  more  or 
less  pronounced  and  prolonged,  and  in  the 
revolution  of  this  cycle  he  will  be  given  an  op- 
portunity not  only  to  purchase  at  a  price  far 
below  a  normal  valuation,  but  to  sell  at  a 
price  far  above  it. 

This  looks  simple  enough  in  the  telling,  and 
is  merely  the  operation  of  Anselm  Rothschild's 
famous  advice,  "buy  cheap  and  sell  dear." 
But  when  the  statement  is  made  that  over  90% 
of  public  purchases  are  made  at  the  approxi- 
mate high  tide  of  a  market  and  about  the  same 
percentage  of  sales  at  the  approximate  low 
tide,  in  short,  that  the  most  simple  and  reason- 


ATTITUDE  TOWARD   SPECULATION       9 

able  methods  of  making  money  are  not  only  dis- 
regarded, but  actually  reversed,  a  great  field 
for  analysis  and  discussion  presents  itself. 

Manipulation  and  trickery  are  vastly  over- 
estimated: popular  prejudice  continually  ac- 
cords to  such  causes  events  which  were  brought 
about  almost  wholly  by  the  composite  folly  of 
public  participators  in  speculative  affairs,  and 
which  could  not  possibly  have  been  effected  by 
any  individual  interests. 

That  these  stages  of  undue  depression  and 
inflation  are  to  some  extent  assisted  by  the 
shrewd  minority,  is  true;  but  the  great  work 
is  that  of  the  public  itself. 

That  the  money-making  minority  foresee, 
and  take  advantage  of  these  extremes,  is  un- 
questionable. They  are  the  cause  of  all  specu- 
lative movements  of  importance,  and  through 
the  errors  and  losses  of  the  lambs  the  ac- 
cumulations of  successful  operators  are  made 
possible. 

After  a  careful  examination,  covering  a 
period  of  ten  years,  and  a  study  of  the  methods 
of  successful  and  unsuccessful  traders  as 
shown  in  some  thousands  of  speculative  ac- 
counts, the  following  facts  are  adduced: 

I  St — The  greatest  causes  of  loss  in  specu- 


10      THE  PITFALLS  OF  SPECULATION 

lation    are    ignorance,    over-speculation,    and 
carelessness,  of  importance  in  the  order  named. 

2nd — The  popular  fallacy  that  business 
methods  are  not  applicable  to  speculation  is 
wholly  erroneous. 

3rd — Not  one  speculator  in  a  thousand  ap- 
plies ordinary  business  precautions  to  his 
trades,  nor  founds  his  ventures  upon  knowl- 
edge of  any  value. 

4th — The  correct  trader  has  little  to  fear, 
and  much  to  gain  from  manipulative  tactics. 

gth — While  extremes  of  prices  move  in  ir- 
regular cycles,  no  "system"  for  judging 
changes  is  possible,  or  tenable,  as  such  me- 
chanical attempts  to  forecast  price  changes  do 
not  contemplate  changed  conditions,  or  pro- 
vide for  accident.  The  advocates  of  the  "Chart 
System"  are  legion,  and  yet  it  is  impossible  to 
find  a  single  permanent  and  substantial  gain 
made  by  this  method. 

6th — The  general  idea  that  the  actual  value, 
and  probable  future  of  a  property  cannot  be 
intelligently  based,  is  erroneous. 

7th — ^The  greatest  speculative  profits  are 
made  in  stocks,  and  the  greatest  speculative 
losses,  in  staples:  wheat,  corn,  cotton,  etc. 

8th — There  are  certain  technical  stages,  or 
conditions  of  markets  which  are  followed  by 


ATTITUDE  TOWARD   SPECULATION     ri 

certain  invariable  results,  the  study  and  recog- 
nition of  which  is  valuable,  and  not  difficult 
These  "ear-marks"  are  in  some  cases  very- 
plain,  and  do  not  in  any  way  smack  of  the 
"systems"  deprecated  above,  but  are  more  or 
less  visible  signs  of  effects  following  certain 
causes. 

gth — Almost  every  general  idea  of  specula- 
tion is  the  exact  reverse  of  the  truth.  Some- 
times this  is  caused  by  false  reasoning,  but 
most  frequently  by  the  innate  false  appearance 
of  the  market  quotations.  For  example/great- 
est activity  and  interest  in  a  market  occurs 
around  top  prices  ;Vvhile  dulness  and  stagna- 
tion are  invariable  when  properties  are  un- 
reasonably low  in  price. 

loth — Persistent  short  selling  of  stocks  is 
fashionable  in  a  certain  class  of  semi-profes- 
sional traders,  and  almost  invariably  results  in 
loss. 

nth — Tips  are  illogical.  Any  wide-spread 
dissemination  of  advance  information  as  to  a 
projected  movement  would  defeat  its  own  ob- 
ject. The  so-called  "tip"'  is  usually  mere  guess 
work.  The  general  consensus  of  public  opinion 
on  this  subject  is  correct,  i.  e.,  tips  are  value- 
less; and  yet  the  public  continues  to  use  them 
largely  as  a  basis  of  trading. 


12       THE  PITFALLS   OF  SPECULATION 

1 2th — Too  great  facilities  for  obtaining  in- 
formation and  executing  orders,  is,  to  the  or- 
dinary trader,  of  no  advantage,  and  is  fre- 
quently a  source  of  loss.  (The  accounts  men- 
tioned above  show  the  most  intelligent  trading 
to  have  been  done  by  traders  who  were  with- 
out facilities  to  interfere  with  their  own 
original  plans  through  fright  or  confusion.) 

13th — Speculation  is  a  safe  business  when 
business  methods  are  applied  to  it.  The 
changes  in  prices  of  standard  properties  offer 
yearly  greater  opportunities  for  profit  than  any 
other  field.  That  is  to  say,  for  reasonable  pro- 
fits, not  for  the  amassing  of  fortunes  on  small 
capital,  in  a  brief  period,  but  for  steady  ac- 
cumulation of  money  and  valuable  knowledge. 
So  great  are  the  opportunities  offered  by  specu- 
lative changes,  that  with  proper  methods  and 
self-control,  the  poor  man  cannot  afford  to 
overlook  them. 

To  make  these  rather  radical  statements  in 
a  general  way  is  wholly  insufficient;  each 
statement  must  be  supported  by  the  presenta- 
tion of  convincing  precedent  and  clear  reason- 
ing, and  it  is  the  purpose  of  these  articles  to 
point  out  the  reasons  for  the  failure  of  the 
majority,  as  well  as  the  methods  by  which  the 
minority  succeed.     This  done,  the  knowledge 


ATTITUDE  TOWARD  SPECULATION     13 

so  gained  must  be  insulated  into  useful  chan- 
nels, and  combined  into  flexible  rules,  and  in- 
flexible laws. 

It  is  not  claimed  that  it  is  possible  to  set 
down  in  print  a  formula  for  speculative  suc- 
cess: much  depends  upon  the  individual.  A 
man  is  not  a  machine,  and  will  be  frequently 
swerved  into  paths  which  he,  himself,  knows 
to  be  dangerous,  and  an  individual  incapable  of 
clear  thinking  and  correct  application  of  ac- 
crued knowledge,  would  not  succeed  at  this,  or 
any  other  business. 

The  most  that  may  be  hoped  for,  conse- 
quently, is  to  point  out  certain  facts  which  will 
lead  to  a  correct  line  of  thinking,  or  open  the 
way  to  profitable  discussion.  To  this  end,  the 
various  causes  of  loss  mentioned  will  be  dis- 
cussed in  turn. 


II 

Ignorance,  Over-Speculation,  Etc. 

IGNORANCE,  over-speculation,  and  the  in- 
nate false  appearance  of  market  stages  are 
the  principal  causes  of  speculative  loss, 
and  are,  in  truth,  the  principal  causes  of  the 
great  cycles  of  speculative  extremes.  These 
extremes  are  variously  attributed  to  specific 
causes,  affecting  certain  securities,  to  good  or 
bad  business  conditions,  or  to  accident  or  man- 
ipulation ;  but  the  fact  of  the  matter  is  that  the 
wide  swings  of  the  market  are  brought  about 
almost  wholly  by  the  errors  and  ignorance  of 
the  great  body  of  traders  known  as  the  public. 
Conditions  change,  accidents  occur,  and 
manipulation  exists,  and  all  have  their  effect; 
but  unless  these  factors  were  supplemented  by 
alternate  waves  of  general  over-confidence, 
and  subsequent  undue  depression,  the  fluctua- 
tions in  market  quotations  for  standard  prop- 
erties would  be  confined  to  such  narrow  limits 
that  the  repeated  opportunities  to  purchase 
such  properties  at  prices  far  below,  and  to  sell 

IS 


i6       THE  PITFALLS   OF  SPECULATION 

them  at  prices  far  above  a  normal  value,  would 
be  eliminated. 

Almost  all  the  commitments  made  by  public 
traders  are  made  on  faith,  or  on  misleading 
surface  appearances.  The  advice  of  people 
absolutely  incapable  of  passing  intelligent 
opinions,  is  eagerly  listened  to  and  frequently 
acted  upon;  large  dividends  on  low-priced 
stocks  are  made  the  basis  of  optimistic  views 
and  shallow  arguments ;  the  fact  that  a  certain 
stock  has  dragged  back  in  a  generally  strong 
market, — ^usually  the  best  evidence  in  the 
world  of  something  radically  wrong  with  that 
particular  stock, — incites  what  may  be  very 
undesirable  purchases.  The  development  of 
certain  long-heralded  events,  such  as  the  pay- 
ment, or  increase  of  a  dividend,  is  considered 
a  good  reason  for  the  purchase  of  the  security 
affected,  when  in  fact  it  is  no  reason  at  all,  as 
Wall  Street  always  anticipates  and  discounts 
probable  good  news.  These  and  a  hundred  and 
one  other  reasons,  mostly  ill-founded,  are  the 
groundwork  of  the  great  bulk  of  public  ven- 
tures, and  the  individuals  who  operate  on  these 
unreliable  signs,  with  full  knowledge  of  the 
fact  that  the  public  has  been  misled  by  them 
time  and  again,  seldom  attempt  to  investigate 
the  intrinsic  value  of  the  property  in  which 


IGNORANCE,   OVER-SPECULATION,   ETC.    17 

they  have  assumed  and  paid  cash  for  a  pro- 
prietary interest.  Such  an  investigation  is 
usually  considered  useless  or  impossible.  If 
this  were  true  any  participation  whatever  in 
speculative  affairs  would  be  folly,  but  fortu- 
nately this  common  opinion  is  itself  the  result 
of  ignorance. 

Over-speculation,  the  composite  result  of 
ignorance,  greed,  and  false  appearances,  may 
be  classed  as  the  primary  cause  of  wide  varia- 
tions in  prices,  for  as  much  too  high  as  a  mar- 
ket is  carried  by  rash  participation  at  high 
prices,  just  as  much  too  low  will  it  sink  in  the 
ensuing  decline.  The  ill-advised  traders  who 
rush  in  at  high  prices  with  inadequate  capital 
are  the  first  to  suffer;  their  overthrow  topples 
over  other  weak  accounts,  and  so  on  down  the 
line,  until  the  last  of  the  wobbly  row  of  bricks 
has  fallen. 

It  might  be  contended  that  when  this  pro- 
cess of  elimination  had  brought  prices  of  good 
properties  to  a  fair  valuation,  purchasers  would 
be  easily  found,  and  such  might  be  the  case, 
were  it  not  for  the  fact  that  the  great  lights  of 
speculative  finance  know  full  well  that  the 
technical  position  of  the  market  is  still  bad; 
that  many  venturers,  already  financially  weak- 
ened by  the  decline  from  abnormal  to  normal 


28       THE  PITFALLS  OF  SPECULATION 

prices,  are  in  a  position  which  they  can  be  forced 
to  abandon;  that  the  pendulum  of  prices  will 
swing  to  the  other  extreme,  and  they  refrain 
from  buying  at  normal  prices  for  the  good  and 
simple  reason  that  they  know  they  can  even- 
tually buy  at  prices  that  are  very  low.  Perhaps 
these  low  prices  will  come  about  unaided, 
through  the  internal  rottenness  of  the  techni- 
cal situation ;  perhaps  the  desirable  consumma- 
tion will  require  a  little  assistance,  such  as  the 
passing  of  a  dividend  or  two,  the  closing  of  a 
few  mills  or  the  laying  off  of  a  few  men,  all  of 
which  actions  can  in  the  future  be  pointed  out 
as  good  and  conservative  business  moves,  but 
which  will  be  received  by  the  public  with  anger 
and  disgust;  for  so  dense  is  general  ignorance 
on  this  one  subject  that  the  payment  of  a  divi- 
dend is  always  considered  good,  and  the  reduc- 
tion or  passing  of  a  dividend  is  always  con- 
sidered bad;  a  bond  issue,  for  whatever  pur- 
pose, is  an  unmixed  evil,  and  so  following. 

The  professional  bear  element  also  assists  in 
the  final  downfall  of  prices.  They  will  be  well 
aware  of  the  assailable  condition  of  the 
weakened  long  interest,  and  will  attack  the 
market  for  the  purpose  of  reaching  stop-loss 
orders  or  forcing  crippled  speculators  to  sell. 
These  same  bears  may  later  be  hoist  with  their 


IGNORANCE,   OVER-SPECULATION,   ETC.   19 

own  petard,  for  a  chronic  bear  is  a  chronic 
loser,  but  meanwhile  they  assist  the  successful 
campaigners  materially  by  forcing  a  tempor- 
arily lower  level  of  prices  and  supplanting 
weak  long  accounts  with  a  short  interest, 
which  is  in  itself  a  great  advantage  to  the  bull 
element. 

So  familiar  is  the  experienced  speculator 
with  public  weakness  that  he  is  usually  found 
operating  in  direct  reversion  to  prevailing  sen- 
timent. He  knows  by  careful  and  clear-headed 
investigation  the  normal  value  of  the  property 
or  properties  in  which  he  trades,  and  at  such 
time  as  he  finds  the  current  quotations  far  be- 
low this  fixed  point  and  the  public  inveighing 
bitterly  against  his  favorite  issues,  he  begins 
his  purchases.  It  does  not  require  much 
shrewdness  to  deduce  the  fact  that  if  a  certain 
standard  security  has  passed  out  of  public,  or 
weak  hands,  it  has  of  necessity  been  concen- 
trated in  the  strong  hands  of  the  giants  of 
finance,  and  that  the  purchaser  at  such  periods 
is  at  least  in  good  company.  He  has  no  fear  of 
any  abnormal  shrinkage  in  the  value  of  his 
holdings,  as  such  sudden  shrinkages  are  the 
result  of  panic  or  financial  necessity,  to  which 
the  present  holders  are  not  subject.  He  also 
knows  that  any  manipulation  must  now  be  for 


20       THE   PITFALLS   OF  SPECULATION 

the  purpose  of  creating  higher  prices,  as  the 
next  great  speculative  move  will  be  to  resell 
the  cheaply  purchased  properties  at  high 
prices,  and  the  public  being  absent,  there  is  no 
one  to  manipulate  against.  He  is  certain  that 
unless  all  precedents  fail,  he  will,  at  some 
future  time,  see  high  prices  and  general  good 
feeling  supplant  the  present  depression. 

As  has  been  stated,  the  innate  false  appear- 
ance of  speculative  surroundings  does  much  to 
influence  public  participation  at  the  wrong 
period.  When  stocks  are  low  in  price  the 
brokerage  offices  are  deserted,  the  newspapers 
say  little  of  speculative  affairs,  transactions  are 
limited,  and  those  who  have  been  worsted  in 
the  preceding  decline  speak  in  pessimistic 
terms  of  the  future.  A  long  period  of  dullness 
almost  invariably  follows  a  severe  decline,  new 
lambs  must  be  born  and  the  old  ones  suffered 
to  grow  a  new  fleece,  and  dullness  is  always 
unattractive.  But  at  the  crest  of  a  great  move- 
ment all  is  activity.  Excited  groups  gather 
about  the  tickers  and  predict  future  events 
founded  principally  on  illusions  or  hope,  and 
stories  of  quickly  acquired  gains  are  heard  on 
every  hand.  A  fever  of  speculation  fills  the  air 
and  men  who  had  no  thought  of  venturing 
during  the  time  of  depression  and  low  prices. 


IGNORANCE,   OVER-SPECULATION,   ETC.   21 

now  purchase  anything  and  everything  at 
prices  that  are  very  high. 

The  mistakes  discussed  above — ignorance; 
the  beUef  that  speculative  riches  are  the  result 
of  luck  rather  than  of  judgment,  over-specula- 
tion and  misleading  surface  appearances,  com- 
bine to  make  it  possible  for  the  shrewd  and 
successful  minority  to  buy  and  sell  periodically 
to  great  advantage  by  an  almost  exact  reversal 
of  public  methods  and  beliefs.  Their  opera- 
tions are  not  founded  on  such  reversion,  but  on 
study  and  knowledge  of  past  precedent,  present 
conditions  and  future  probabilities.  The  fact 
that  public  opinion  is  diametrically  opposed  to 
their  views  may  be  cheerfully  considered  as  ex- 
cellent proof  of  the  correctness  of  their  de- 
ductions, as  the  public  is  usually  wrong. 

If  the  statements  made  above  are  admitted 
to  be  correct  the  lesson  they  teach  is  obvious. 
To  result  successfully,  speculative  ventures 
must  be  based  on  sound  reasoning  and  a 
knowledge  of  correct  normal  values;  on  a 
willingness  to  confine  operations  to  reasonable 
limits  and  upon  emancipation  from  the  moving 
influences  of  general  exhiliration  or  depression. 
The  individual  who  begins  or  pursues  his  oper- 
ations on  these  great  fundamental  principles 
has  taken  a  great  step  toward  the  goal  of  suc- 
cess. 


Ill 

Manipulation 

THERE  are  two  classes  of  manipulative 
tactics  indulged  in  by  the  inside  workers 
of  Wall  Street ;  the  long  range  tactics  of 
the  great  but  silent  workers  who  lay  a  plan 
contemplating  a  complete  speculative  cycle 
from  high  to  low  prices,  and  the  more  frequent 
and  drastic  operations  of  room  traders  who 
find  a  market  in  a  bad  technical  position  and 
operate  for  known  effects,  either  as  a  matter  of 
immediate  profit  or  to  rid  themselves  of  a  dan- 
gerous following.  The  success  of  both  is  de- 
pendent upon  public  folly. 

In  the  first  class  lies  the  hidden  and  care- 
fully calculated  work  of  haute  finance.  It  con- 
sists of  creating,  or  helping  to  create,  false  im- 
pressions as  to  the  value  of  a  certain  property, 
of  lending  encouragement  to  buy  at  high 
prices,  or  to  sell  (or  at  least  to  refrain  from 
buying),  at  low  prices.  The  motives  are 
obvious :  to  create  a  demand  for  the  goods  for 

23 


24       THE  PITFALLS   OF  SPECULATION 

sale,  and  to  create  a  supply  of  the  goods  whose 
purchase  is  contemplated. 

This  high  form  of  financiering  is  always 
helped  by  shrewd  choosing  of  propitious 
periods  and  surroundings,  and  its  moving  fac- 
tors, though  potent  with  result,  are  so  veiled 
and  untraceable  as  to  render  supportable  criti- 
cism impossible. 

The  recent  price  movements  of  the  proper- 
ties of  the  United  States  Steel  Corporation  fur- 
nish a  pointed  example  of  this  method  of  finan- 
ciering. The  stocks  were  offered  to  the  public 
at  prices  which  were  really  fair,  statements 
were  issued  which  were  unquestionably  cor- 
rect, and  dividends  were  paid  which  were 
doubtless  earned.  The  periodical  reports  were 
rosy,  but  they  were  true.  The  great  earnings 
were  made,  and  called  attention  to  the  high 
tide  of  a  period  of  unusual  activity  and  prices, 
but  the  public  did  not  take  the  trouble  to  as- 
certain this  important  fact.  They  saw  only 
one  thing,  that  large  dividends  were  being 
paid,  and  still  larger  earnings  being  carried  to 
surplus,  by  a  company  whose  stocks  were  sell- 
ing at  low  prices.  They  looked  neither  back- 
ward nor  forward,  but  glued  their  eyes  upon 
the  insufficient  facts  of  the  present.  A  little 
knowledge  would  have  proven  that  not  only 


MANIPULATION  25 

were  the  recent  and  present  earnings  unusually 
large,  but  that  all  such  abnormal  periods  are 
followed  by  a  reaction. 

These  simple  facts,  known  and  recognized  in 
the  abstract  as  being  true  of  all  businesses, 
were  lost  in  the  greed  and  fever  of  speculation. 
Knowledge  and  study  played  no  part  in  the 
affair;  the  present  was  all-sufficient,  and  the 
public  bought  largely,  both  for  investment  and 
on  margins;  and  by  the  same  token,  the  pro- 
moter sold.  Later  the  earnings  fell  off,  which 
was  perfectly  natural,  money  was  lavishly  dis- 
bursed, their  holdings  increased  by  the  pur- 
chase of  new  properties ;  the  surplus  dwindled, 
and  dividends  on  the  common  stock  were  re- 
duced and  eventually  suspended  altogether. 

A  •  public  change  of  heart  took  place,  and 
views  of  the  company's  future  changed  from 
extreme  rosiness  to  cross-grained  cynicism. 
Again  the  present  was  made  the  only  stan- 
dard; the  stock  was  watered;  the  common 
shares  were  absolutely  worthless;  future  divi- 
dends were  impossible,  etc. 

The  fact  that  a  great  deal  of  money  had  been 
intelligently  diverted  into  channels  which 
could  not  but  enhance  the  future  value  of  the 
corporation  was  not  considered,  and  so,  during 
a   natural   period   of    reaction,    the    disgusted 


a6       THE  PITFALLS  OF  SPECULATION 

public  gradually  relinquished  their  holdings, 
and  they  passed  back,  little  by  little,  into  the 
hands  of  their  original  owners  at  prices  ridicu- 
lously low. 

From  the  standpoint  of  the  great  manipu- 
lators, it  was  beautifully  done.  Not  one  argu- 
ment could  be  brought  against  them  which 
could  not  be  amply  defended.  "We  paid  divi- 
dends because  we  earned  them,  and  you,  our 
stock-holders,  clamored  for  them  and  approved 
of  them;  we  gave  to  the  world  statements  of 
every  dollar  received  and  disbursed;  nothing 
was  misrepresented,  nothing  was  concealed. 
When  the  iron  and  steel  business  suffered  a 
relapse,  and  our  surplus  had  been  lowered  by 
excellent  and  necessary  expenditures,  we  did 
what  every  business  man  does — decreased  our 
expenses  and  our  dividends  until  an  improve- 
ment was  apparent.  We  are  not  responsible 
for  the  actions  of  Wall  Street,  and  if  you,  as  an 
individual,  made  ill-advised  purchases  and 
sales,  or  over-speculated,  that  is  no  fault  of 
ours.  Yes,  we  did,  as  individuals,  sell  some 
stocks  at  prices  which  we  considered  fair,  and 
likewise  re-purchased  at  prices  which  are  con- 
sidered low.  That  was  a  matter  of  business, 
and  was  our  privilege.  We  have  absolute  con- 
fidence in  our  properties  and  their  future  and 


MANIPULATION  27 

always  have  had.  You  cannot  blame  us  for 
your  mistakes ;  you  beat  yourselves ;  get  out !" 

This  is  unanswerable,  but  the  fact  remains 
that  these  men  knew  what  the  effect  of  their 
actions  would  be  and  acted  accordingly.  No 
one  who  has  a  personal  acquaintance  with  Mr. 
Morgan  and  his  principal  lieutenants  would 
harbor  any  thought  of  their  having  participated 
in  the  general  enthusiasm,  and  making  the 
error  of  themselves  believing  there  would  be 
no  reaction  in  the  large  earnings  and  good 
condition  of  the  affairs  of  the  Steel  Corpo- 
ration.   Never. 

That  they  had  faith  in  their  properties  is 
literally  true,  and  it  is  doubtful  if  the  largest 
holders  would  have  parted  so  freely  with  their 
stocks  but  that  they  knew  absolutely  what 
would  happen,  and  that  the  stocks  would  per- 
force be  returned  to  them  at  low  prices. 
Neither  did  they  find  it  necessary  to  cripple  or 
permanently  injure  their  great  consolidation  to 
bring  about  their  grand  coup.  The  shares  had 
the  same  inherent  value  at  the  lowest  range, 
as  at  the  highest. 

It  is  unquestionably  true  that  if  the  mag- 
nates "who  never  speculate"  had  not  foreseen 
and  acted  upon  public  folly,  no  dividends 
would  have  been  paid  which  could  not  have 


28       THE  PITFALLS   OF   SPECULATION 

been  maintained,  and  instead  of  the  wild  pyro- 
technics and  wide-price  range  of  steel  stocks, 
the  properties  would  have  steadily  increased 
in  value  from  the  birth  of  the  concern. 

There  is  nothing  new  in  all  this — it  is  a  time- 
honored  method  of  speculative  financiering, 
from  the  repetition  of  which  the  public  seems  to 
learn  nothing,  and  from  which  the  most  power- 
ful interests  make  their  largest  returns. 

The  second  class  of  manipulation,  more 
recognizable  as  such,  is  more  brief  as  to  period 
and  more  restricted  as  to  results,  but  is  potent 
enough  at  times  to  bring  about  changes  and 
appearances  which  either  force  or  frighten 
holders  out  of  a  good  position,  or  mislead  them 
into  a  bad  one. 

The  cry  is  frequently  heard  that  the  public 
is  not  in  the  market,  and  this  state  of  affairs  is 
usually  pointed  out  as  a  reason  for  stocks  not 
advancing.  This  view  is  another  evidence  of 
the  reversed  reasoning  so  prevalent  in  specu- 
lative matters. 

The  very  last  thing  the  great  speculators 
want  in  the  market  is  such  an  interest  at  low 
prices,  or  even  at  midway  points  in  an  advance. 
So  undesirable,  in  fact,  is  such  an  element  that 
its  presence  means  defeat  for  the  sponsors  of 
the  deal  themselves,  and  a  projected  movement 


MANIPULATION  29 

is  sometimes  abandoned  temporarily  on  ac- 
count of  too  large  a  following.  The  most  ap- 
proved method,  however,  is  to  "shake  out"  and 
discourage  this  following.  The  process  is 
simple ;  the  great  Inside  element  finding  them- 
selves in  company  of  numerous  "tailers," 
whose  weakness  and  liability  to  panic  on  the 
slightest  pretext  may  ruin  their  own  devices, 
take  advantage  of  just  such  known  weakness, 
and  with  the  assistance  of  the  professional 
bears,  proceed  to  drive  their  undesirable  friends 
away.  To  accomplish  this,  support  is  with- 
drawn and  a  portion  of  the  accumulated  hold- 
ings sold  ostentatiously.  The  bear  element, 
fully  aware  of  the  assailable  state  of  the 
market,  assists  the  manipulators  by  heavy  sales 
and  vicious  drives.  The  enthusiastic  public, 
crippled,  discouraged  and  disgusted,  drop  their 
holdings,  and  a  considerable  number  of  half- 
baked  bears  join  in  the  same  game  of  "follow 
the  leader,"  until  a  short  interest  is  created. 
Meanwhile,  the  original  projectors  replace 
their  holdings  at  opportune  times,  perhaps  at 
a  lower  average  than  that  at  which  their  spec- 
tacular sales  were  made,  perhaps  not — but  the 
physicking  has  been  accomplished,  the  atmos- 
phere is  cleared,  and  the  "deal"  which  they  had 
never  for  a  moment  contemplated  abandoning, 


30       THE  PITFALLS   OF  SPECULATION 

goes  merrily  on  until  such  time  as  another 
purging  may  be  necessary. 

These  two  forms  of  speculative  tactics,  with 
their  various  off-shoots,  constitute  the  funda- 
mental basis  of  manipulation.  They  are  widely 
different;  the  one,  the  long  distance  work  of 
the  great  "financier"  who  pays  no  heed  to 
ordinary  movements,  but  works  toward  a 
great  end;  the  other,  the  tactics  of  purely 
speculative  interests.  The  first  is  responsible 
for  the  long  swing  of  the  market;  the  second 
for  many  of  its  sharp  intermediate  changes; 
but  both  are  united  in  one  thing,  they  work  to- 
gether for  the  undoing  of  the  general  public. 

The  man  who  invests,  or  speculates  for  the 
long  swing  may,  like  the  first  class,  disregard 
all  ordinary  hippodroming,  and  await  certain 
results. 

The  man  who  indulges  more  freely  in  specu- 
lative ventures  must  bring  to  his  aid  clear 
thinking,  study  and  vigilance.  Above  all  things 
he  must  provide  for  sharp  changes  financially, 
and  if  he  is  caught  in  a  flurry,  his  embarrass- 
ment will  be  only  temporary. 

In  both  cases  everything  depends  upon  an 
intelligent  basis  of  normal  valuation,  for  to  that 
basis,  if  correctly  estimated,  the  price  of  his 
holdings  will  eventually  revert. 


MANIPULATION  31 

All  the  manipulation,  accident  and  trickery 
in  the  world  can  not  keep  prices  too  low  nor 
too  high  for  long.  The  needle  of  the  compass 
may  be  disturbed  and  swing  nervously  from 
side  to  side,  but  it  must  point  to  the  true  north 
at  last. 


IV 

Accidents 

ACCIDENTS  or  unexpected  events  fre- 
quently mark  the  beginning  of  sharp  or 
extended  declines.  It  is  generally  con- 
sidered that  anything  in  the  nature  of  an  acci- 
dent must  be  in  favor  of  the  bear  element. 

This  theory  in  the  abstract  is  sound  enough, 
as  accident  and  disaster  are  nearly  synony- 
mous, but  careful  consideration  of  the  subject 
will  develop  the  fact  that  in  the  speculative 
world  accidents  are  more  frequently  the  excuse 
for,  than  the  cause  of,  any  severe  or  extended 
decline,  and  their  effects  are  to  be  measured  by 
the  stage  and  condition  of  the  market,  rather 
than  by  their  actual  capacity  for  evil. 

Nothing  in  the  nature  of  the  unforeseen  can 
be  conceived  as  happening  which  could  per- 
manently injure  or  retard  the  growth  and  value 
of  good  properties. 

The  United  States  has  such  recuperative 
power  that  the  naturally  increasing  value  of 
her  properties  can  easily  overcome  the  tempo- 

33 


34      THE  PITFALLS  OF  SPECULATION 

rary  effects  of  unforeseen  occurrences.  It  is 
reasonable  to  believe  that  if  all  the  accidents 
which  have  occurred  and  have  been  pointed  out 
as  the  cause  of  great  market  changes  in  the  last 
ten  years  had  never  happened,  stocks  would 
still  be  at  the  same  approximate  level  as  they 
are  today. 

It  is  admitted  that  accidents  frequently  ad- 
minister the  little  shove  to  an  already  bad  state 
of  affairs  which  hastens  a  decline  that  must 
have  eventually  and  inevitably  occurred,  acci- 
dent or  no  accident.  This  is  not  wholly  an  un- 
mixed evil,  as  it  may  be  the  means  of  checking 
excesses,  which,  if  allowed  to  continue,  might 
result  in  even  more  severe  consequences. 

On  the  other  hand,  an  accident  may  some- 
times mark  the  very  beginning  of  a  great  up- 
ward movement  by  frightening  from  the 
market  at  low  prices  weak  and  foolish  specu- 
lators whose  very  presence  spells  danger,  and 
attracting  to  it  far-seeing  men  who  gauge 
prices  by  values. 

The  danger  of  adverse  litigation,  (which  may 
be  classed  among  unforseen  events),  against 
good  properties  is  slight.  Annually,  numer- 
ous tirades  are  begun  against  combinations  and 
individual  corporations  in  the  legislative  halls. 


ACCIDENTS  35 

or  in  the  columns  of  the  public  press,  supple- 
mented by  the  railing  of  the  notoriety-seeking 
charlatans  who  find  it  popular  to  inveigh 
against  capital  in  general,  but  the  fact  remains 
that  no  measures  will  be  taken,  or  at  least  no 
measures  can  endure,  that  will  prevent  the 
builders  of  railroads,  or  the  capitalizers  of 
great  industries  from  making  good  returns  on 
their  money,  or  from  seeing  their  investments 
grow  in  value  through  the  advance  of  demand 
and  population.  Such  measures,  expounded  by 
dreamers,  or  socialistic  tin-horn  tooters,  strike 
at  the  very  foundation  of  business  extension, 
and  per  contra,  any  individual  or  coterie  of  in- 
dividuals, who  seek  to  overdo  the  extension  of 
capital,  or  make  it  bring  exorbitant  and  un- 
natural returns,  will,  like  the  toad  in  the  fable, 
burst  by  self-inflation. 

Stripped  of  these  two  extremes,  business 
conditions  are  sound  and  solid,  and  gradual 
growth  and  prosperity  are  assured. 

The  unexpected  calling  of  loans,  the  ex- 
portation of  gold,  the  killing  of  crops,  sharp 
changes  in  the  attitude  of  foreign  markets,  etc., 
are  matters  which  are  to  be  expected  annually, 
either  as  natural  or  manipulated  events  under 
any  and  all  conditions,  and  are  almost  wholly 
impotent  to  change  the  course  of  a  long  swing 


36       THE  PITFALLS   OF  SPECULATION 

to  high  or  low  prices.  Like  the  boy  who  cried 
"Wolf,  Wolf,"  on  every  occasion,  they  lose 
their  importance  by  repetition. 

True,  these  minor  signs  may  to  the  close 
student  sometimes  appear  as  straws  indicating 
the  course  of  the  financial  wind,  but  generally 
speaking,  nothing  short  of  a  wide-spread  and 
severe  disaster  can  change  the  course  of  the 
great  cycles  of  speculation,  the  repeated  and 
unchecked  revolutions  of  the  wheel  of  fortune. 

A  good  illustration  of  the  statement  that 
accidents  frequently  prove  merely  the  puff  of 
wind  which  topples  over  an  already  rotten 
structure,  is  found  in  the  death  of  the  late  R.  P. 
Flower.  This  unexpected  occurrence  was  fol- 
lowed by  a  radical  and  extended  decline  in  the 
properties  known  as  the  "Flower  Stocks."  It 
cannot  be  reasonably  claimed  that  the  cancel- 
lation of  Mr.  Flower's  personality  affected  the 
securities  in  question,  as  the  number  of  stocks 
in  the  group,  and  the  fact  that  he  had  no  voice 
in  the  affairs  of  some  of  his  favorites,  com- 
bined to  render  any  personal  direction  of  the 
internal  workings  of  the  properties  involved, 
impossible.  His  personal  efforts,  for  instance, 
could  not  have  sustained  Brooklyn  Rapid 
Transit  above  par;  the  stock  was  not,  and 
never  has  been  worth  the  prices  at  which  it 


ACCIDENTS  37 

sold.  It  may,  probably  will,  at  some  future 
day  be  cheap  at  that  figure,  but  at  the  time  in 
question,  the  price  was  premature,  if  not  ridicu- 
lous. What  followed  Mr.  Flower's  demise 
must  have  occurred  from  its  own  inherent 
weakness,  sooner  or  later;  the  event  simply 
hastened  the  inevitable. 

It  is  not  the  intention  in  the  above  illus- 
tration to  cast  any  aspersions  upon  the 
methods  or  memory  of  the  financier;  he  was 
sincere,  but  an  enthusiast.  He  told  his  friends 
certain  things  would  happen,  and  believed  they 
would.  His  speculative  campaign  attracted  to 
him  a  large  and  dangerous  following,  and  his 
views  of  values  were  based  more  upon  optim- 
ism than  reason.  He  was  honest,  but  he  was 
mistaken. 

The  death  of  a  great  financier  is  always  con- 
sidered for  its  probable  market  effect,  which 
must,  of  course,  be  measured  by  the  actual  re- 
sult. The  probability  of  such  an  event  acting 
as  a  fillip  to  an  already  over-strained  condition 
may  be  eliminated  on  the  theory  that  in  such 
cases  they  become  excuses,  not  causes.  It  is 
not  reasonable  to  believe  that  the  removal  of 
any  one  man  from  the  financial  map  will  be 
followed  by  any  sustained  depression.  The 
affairs  of  such  men  almost  invariably  revert  to 


38       THE  PITFALLS   OF  SPECULATION 

good  hands  by  direct  succession,  and  the  popu- 
lar fallacy  about  rich  men's  sons  is  being  con- 
tinually disproved  by  such  men  as  the  Vander- 
bilts,  George  Gould,  and  Ogden  Armour. 

Mr.  Gould's  death  was,  if  anything,  a  boon  to 
the  speculative  world;  he  was  a  trickster  and 
a  wrecker;  his  son  is  a  "builder-up."  Even  in 
the  improbable  event  of  a  great  financier 
dying  intestate  his  holdings  would  quickly  find 
a  resting  place  in  strong  hands  at  their  true 
value. 

The  danger  of  wide-spread  epidemic  has 
always  been  regarded  as  a  bear  point,  and  were 
it  not  for  the  fact  that  the  advance  of  science 
and  the  improvement  in  sanitary  conditions 
now  invariably  confines  even  the  most  con- 
tagious and  virulent  diseases  to  limited  areas, 
the  devastations  of  a  plague  might  be  seriously 
regarded.  As  it  is,  the  probability  of  any  ma- 
terial damage  from  such  a  source  is  remote, 
and  the  bears,  wont  to  welcome  with  open 
arms,  ruin,  devastation  and  death,  have  almost 
discarded  them  as  weapons.* 

The  most  serious  of  all  events  classed  as 
accidents,  is  war,  with  its  heavy  entail  and 

*In  the  cholera  scare  of  1892,  -when  the  "yellow  flag,"  in- 
dica-ting  cholera  on  board,  was  shown  outside  the  New  York 
harbor,  an  excited  bear  rushed  upon  the  floor  of  the  Exchange, 
shouting,  "Hurrah,  hurrah,  the  cholera  Is  here."  H«  was 
suspended. 


ACCIDENTS  39 

general  disruption  of  affairs.  That  our  coun- 
try will  not  be  plunged  into  a  disastrous  or 
prolonged  war  must  be  taken  on  faith,  and  the 
struggles  of  other  nations,  in  which  we  are  not 
involved,  is  productive  of  more  good  than  evil ; 
as,  while  it  may  bring  about  the  forced  selling 
of  some  of  our  securities  held  abroad,  it  also 
places  the  United  States  in  the  position  of  a 
huckster,  and  makes  a  market  for  our  products 
at  materially  higher  prices,  which  prosperous 
condition  must  be  reflected  in  all  lines  of  busi- 
ness. No  better  example  of  this  could  be  given 
than  the  recent  struggle  between  Russia  and 
Japan. 

The  contention  is  therefore  made  that  while 
accident  is  frequently  made  the  excuse  for 
speculative  declines,  it  is  seldom  the  cause,  and 
that  if  conditions  are  sound  and  prices  low,  any 
sharp  decline  brought  about  by  unforseen  hap- 
penings creates  opportunities  which  would 
otherwise  not  have  existed.  On  the  occasion 
of  public  fright  at  such  stages,  it  is  frequently 
the  case  that  great  men  come  to  the  "assist- 
ance" of  the  market,  and  buy  stocks  heavily, 
(when  they  are  low  enough),  and  are  hailed  as 
public  benefactors.  That  such  purchases  are 
made  from  purely  philanthropic  motives  is,  to 
say  the  least,  doubtful. 


40       THE  PITFALLS   OF  SPECULATION 

The  speculator,  therefore,  who  has  mapped 
out  a  well-formed  plan  of  operation,  can  afford 
to  ignore  the  probability,  or  possibility  of  acci- 
dent, except  to  provide  for  any  sudden  flurry 
occasioned  by  such  causes;  or,  if  an  active 
operator,  may  sometimes  take  advantage  of  un- 
reasonable fright  and  apprehension  to  replace, 
or  increase  his  holdings. 

There  is  no  gainsaying  the  fact  that  a  seri- 
ous accident  or  event  is  possible;  but  to  be 
effective  it  must  be  in  the  nature  of  a  far- 
reaching  disaster,  and  may  be  viewed  by  the 
trader  with  about  the  same  degree  of  appre- 
hension as  he  views  the  danger  of  being  struck 
by  lightning  in  his  daily  walks. 


Business  Methods  In  Speculation 

FEW  men  embark  in  a  business  pursuit  of 
any  kind  without  a  careful  examination 
of  the  prospects  and  environments  of 
their  ventures.  If  a  business,  or  an  interest  in 
a  business ;  is  to  be  purchased,  the  past,  present 
and  probable  future  of  that  business  are  care- 
fully examined.  The  assets  and  liabilities  are 
compared,  the  record  of  past  sales  and  profits 
are  considered,  and  the  probable  future  of  the 
community,  or  territory  from  which  the  busi- 
ness draws  its  revenue,  is  given  particular  at- 
tention, and  also,  the  danger  of  a  decimation  of 
profits  through  competition  is  considered.  The 
character  of  the  individuals  concerned  as  part- 
ners or  managers  is  weighed,  and  if  found 
wanting,  the  proposition  is  discarded,  as  con- 
fidence between  men  is  the  foundation  of  all 
successful  combinations. 

Neither  does  the  prospective  purchaser  enter 
his  field  without  some  special  education  for  the 
business  in  hand,  or  at  least  not  without  a 

41 


42       THE  PITFALLS   OF  SPECULATION 

determination  to  watch  and  learn  daily  some- 
thing of  the  technicalities  of  his  enterprise. 

These  simple  facts  are  recognized  the  world 
over  as  merely  plain,  sensible  precautions 
adopted  by  all  business  men  in  all  businesses — 
all  except  one — the  widely  patronized  business 
of  speculation. 

This  disregard  of  recognized  business  rules 
and  laws  is  caused  largely  by  the  fact  that  the 
multiplicity  of  speculative  properties  with  their 
large  capitalizations  stagger  the  ordinary  mind, 
and  lead  a  man  into  the  error  of  considering 
himself  incapable  of  grappling  with  so  great  a 
problem,  and  partly  by  a  misplaced  confidence 
in  the  expressed  belief  of  others. 

The  opinions  of  brokers  are  given  a  degree 
of  credence  to  which  they  are  seldom  entitled, 
for,  sad  to  relate,  the  lack  of  study  and  method 
is  almost  as  prevalent  behind  the  office  railing 
as  outside  of  it,  in  addition  to  which  the  desire 
to  make  commissions  frequently  leads  the 
broker  to  an  expression  of  encouraging  views 
running  parallel  with  the  ideas  of  the  client, 
whether  such  views  are  sincere  or  not. 

The  emphatic  opinions  of  friends  and  ac- 
quaintances dre  also  greatly  over-rated  at 
times,  especially  if  the  advisor  has  been  fortu- 
nate in  his  recent  ventures,  which  fact  alone  is 


BUSINESS  METHODS  IN  SPECULATION  43 

a  dangerous  and  insufficient  guide.  This  will- 
ingness to  accept  the  alleged  thinking  and 
knowledge  of  others  frequently  results  in  al- 
most total  elimination  of  thought  and  knowl- 
edge as  a  basis  of  operation.  It  is  doubtful  if 
a  single  case  of  sustained  success  in  specu- 
lative ventures  can  be  pointed  out  that  was 
not  founded  upon  individual  study  and  investi- 
gation. 

The  idea  that  large  properties  cannot  be  in- 
vestigated intelligently  is  a  mistake.  Every 
standard  listed  security  must,  under  the  rules 
of  a  well  conducted  exchange,  offer  to  the 
public  every  facility  for  such  investigation. 
The  size  of  a  property  is  only  a  matter  of  de- 
gree, a  multiplication  of  what  represents  and 
belongs  to  a  single  share  of  stock;  or,  per 
contra,  the  value  of  one  share  of  stock  is  a 
division  of  the  whole. 

Facts  and  figures  as  to  assets,  earning 
capacity,  territory  and  past  history  are  easily 
obtainable,*  and  the  value  of  the  deductions 
resulting  from  the  thorough  and  painstaking 
scrutiny  of  a  property  is  to  be  gauged  only  by 
individual  capacity  for  clear  thinking,  stripped 
of  foolish  credulity  and  pig-headed  prejudice. 

The  advantages  of  choosing  for  operations 

•See  The  Art  of  Wall  Street  Investing. 


44       THE   PITFALLS   OF  SPECULATION 

the  standard  properties  listed  upon  the  New 
York  Stock  Exchange  are  manifold.  There  is 
always  a  market  for  these  properties,  which  is 
not  true  of  wild-cat  securities;  they  are  ad- 
mitted to  the  benefits  of  the  exchange  on  de- 
monstrated merits,  and  under  inflexible  rules. 
True,  a  few  bad  properties  have  made  their 
way  into  the  exchange,  but  they  have  been  the 
exception,  not  the  rule. 

The  governors  of  the  exchange  are  men  of 
unquestioned  business  integrity  and  honor,  and 
exercise  every  precaution  to  exclude  undesir- 
able stocks. 

It  may  be  contended  that  the  public  has  been 
dumped,  time  and  again  by  the  fluctuations  of 
listed  stocks,  which  is  exactly  true;  but  that 
has  been  the  fault  of  public  error,  and  not  of 
the  rules  of  the  stock  exchange,  nor  lack  of 
merit  in  the  properties  themselves. 

The  man  who  begins  his  investigations  as  to 
the  actual  value  of  a  listed  property,  therefore 
begins  with  one  which  holds  a  high  place  in 
the  business  world,  and  which  certainly  has 
some  value.  It  is  his  business,  therefore,  to 
estimate  carefully  this  value,  and  upon  the  re- 
sult to  base  his  operations.*    This  knowledge  of 


♦The  writer's  views  as  to  the  best  method  of  mablni:  such 
an  investigation  will  appear  in  a  succeeding  chapter. 


BUSINESS  METHODS  IN  SPECULATION  45 

an  approximate  valuation  will  prove  of  great 
importance,  and  will  materially  aid  the  pos- 
sessor, and  prevent  him  from  undue  exhila- 
ration or  depression. 

He  may  reasonably  argue  that  all  general 
depression  will  be  followed  by  improvement, 
and  that  every  bubble  of  inflation  will  be 
pricked.  The  United  States  will  take  care  of 
itself  and  all  of  its  good  properties. 

Matters  of  moment  bearing  upon  his  particu- 
lar property  will,  of  course,  be  weighed  care- 
fully, and,  if  of  sufficient  importance,  may 
necessitate  the  changing  of  his  basis  of  valu- 
ation, either  to  a  higher  or  a  lower  level,  but 
this  will  be  done  carefully  and  slowly. 

One  thing  the  investigator  may  safely  con- 
sider in  his  favor,  and  that  one  thing  is  of  high 
importance :  that  the  good  properties  of  a  new 
country  are  certain  to  gradually  advance  in 
value,  with  a  tendency  to  restricted  fluctuations 
until  final  absorption  takes  place. 

This  fact  is  easily  explained:  a  new  country 
offers  in  the  sudden  development  of  its  virgin 
resources  opportunities  which  render  fair  per- 
centage returns  unattractive,  and  speculative, 
or  even  investment  capital  seeks  these  chan- 
nels. But  as  these  opportunities  are  gradually 
restricted  by  development,  money  seeks  the 


46       THE  PITFALLS   OF  SPECULATION 

dividend  paying  properties  which  will   yield 
perpetual  returns. 

The  man  who  speculates  in  a  business-like 
manner  will  at  once  see  the  necessity  of  en- 
tirely eliminating  abnormal  possibilities  and 
rashness  from  his  plan  of  operation.  The  dif- 
ference between  expecting  from  the  market 
what  is  reasonable,  and  expecting  too  much; 
and  between  buying  what  can  be  reasonably 
protected,  and  even  increased,  and  plunging, 
is  exactly  the  difference  between  success  and 
failure. 

He  who  buys  one  thousand  shares  of  stock 
on  a  total  capital  of  ten  thousand  dollars  is 
ruined  before  he  begins  trading.  He  may  suc- 
ceed once,  twice,  or  twenty  times,  but  his  ulti- 
mate failure  is  as  certain  as  death. 

Many  men  with  sound  ideas,  and  whose  ven- 
tures have  proved  ultimately  the  correctness 
of  their  views,  have,  by  the  one  fault  of  over- 
trading, become  paupers,  when,  with  business 
methods,  they  might  have  become  millionaires. 

It  is  one  of  the  many  strange  facts  about  the 
great  field  of  opportunity  called  speculation, 
that  men  who  consider  ten  per  cent,  a  good 
return  on  capital  in  ordinary  business  are 
wholly  dissatisfied  with  one  hundred  per  cent, 
in  a  speculative  venture. 


BUSINESS  METHODS  IN  SPECULATION  47 

The  business  man  in  speculation  will  find  it 
expedient  to  divorce  himself  from  the  alluring 
attractions  of  the  ticker  itself.  Many  traders 
whose  long  range  views  of  values  and  ap- 
proaching conditions  are  good,  get  their  noses 
sc  close  to  the  ticker  as  to  shut  out  the  true 
perspective.  They  deceive  themselves  into  the 
belief  that  they  are  keeping  well  posted  by 
haunting  the  brokerage  offices  and  following 
the  mass  of  good,  bad  and  indifferent  gossip, 
conflicting  opinions,  canards,  and  predictions, 
as  well  as  being  swayed  by  the  innumerable 
flurries  which  occur  alm.ost  daily,  and  are  al- 
ways accompanied  by  an  excuse.  For  a  man 
is  human,  and  no  matter  how  phlegmatic  by 
nature  or  cultivation,  is  more  or  less  moved 
by  these  pernicious  influences. 

Anything  worthy  of  consideration  may  bet- 
ter be  considered  in  cold  blood,  than  in  the 
active  time  and  place  of  speculation,  and  if 
commitments  have  been  intelligently  made  and 
provided  for,  propinquity  to  the  ticker  will  far 
oftener  prove  a  detriment  than  an  aid  to  profits. 
There  are  no  doubt  many  professional  scalpers, 
whose  business  is  the  chasing  of  fractions,  who 
watch  the  slightest  variation  in  quotations, 
and  by  so  doing  make  some  money — a  great 
deal  less,  by  the  v/ay,  than  is  popularly  sup- 


48      THE   PITFALLS   OF   SPECULATION 

posed — and  who  find  their  constant  presence 
at  the  ticker  a  necessity  to  their  particular 
scheme  of  operation,  but  these  articles  are  not 
written  for  their  benefit. 

The  time  spent  in  gathering  a  bewildering 
mass  of  false  impressions,  so  untrustworthy  as 
to  be  ridiculous,  and  so  numerous  as  to  be  con- 
fusing, can  be  much  more  profitably  spent  as 
every  really  successful  operator  spends  his 
time,  in  study  and  sound  reasoning. 

The  choosing  of  a  broker  is  important,  finan- 
cial responsibility  and  personal  integrity  being 
the  first  considerations.  Brokers  who  offer  re- 
ductions from  the  fixed  standard  of  interest 
and  commissions  should  be  regarded  with  sus- 
picion; such  advantages  are  usually  dearly 
purchased.  Standard  charges  are  not  un- 
reasonably high,  and  are  not  to  be  considered 
a  drawback  if  general  methods  are  correct. 

A  good  broker  may  also  frequently  aid  in 
the  forming  of  opinions,  or  in  the  confirmation 
of  opinions  already  formed;  but  as  every 
trader,  to  succeed,  must  do  his  own  thinking, 
this  is  not  of  so  much  im^portance  as  is  the 
assurance  of  stability  and  probity.  It  is  cold 
comfort  to  see  one's  carefully  figured  deduc- 
tions confirmed,  and  then  see  the  results  vanish 


BUSINESS  METHODS  IN  SPECULATION    49 

in  the  failure  of  an  unreliable  house,  and  yet 
this  same  event  occurs  again  and  again. 

Summing  up,  the  man  who  speculates  in  a 
business-like  way  trades  only  in  standard  prop- 
erties with  whose  history,  physical  condition, 
earnings  and  prospects  he  has  thoroughly 
familiarized  himself;  forms  for  himself  a  care- 
ful estimate  of  normal  value  and  uses  this 
value  as  a  gauge  by  which  to  decide  when 
prices  are  too  low  and  too  high ;  takes  into  con- 
sideration also  the  technical  condition  of  the 
market,  and  does  not  embark  with  bad  com- 
pany, even  at  low  prices ;  is  not  misled  by  the 
thrills  of  inflation,  or  the  chills  of  depression; 
operates,  not  for  the  purpose  of  gathering  a 
small  profit  from  many  transactions,  but  to 
gather  a  large  profit  from  a  few;  trades  with 
responsible  middle-men,  and,  above  all  things, 
is  patient.  In  short,  he  maps  out  for  himself 
an  intelligent  and  well-founded  plan  of  oper- 
ation, contemplating  all  that  may  occur,  and 
having  mapped  it  out,  follows  it. 

Very  few  speculate  in  this  manner,  and — 
very  few  succeed. 


VI 

Market  Technicalities 

THE  study  of  technicalities,  of  which  little 
is  generally  known,  and  about  which 
nothing  has  been  written,  is  of  great  im- 
portance to  the  speculator,  and  particularly  to 
the  active  trader. 

The  two  most  glaring,  as  well  as  the  most 
important  technical  appearances  which  mark 
the  top  and  bottom  of  a  speculative  cycle,  have 
been  commented  on  in  a  previous  chapter;  they 
consist  of  dullness  and  stagnation  at  the  bot- 
tom of  a  movement,  and  crazy  recklessness 
and  universal  participation  at  the  other  ex- 
treme. 

In  addition  to  the  facts  that  have  already 
been  presented  in  regard  to  these  two  extremes, 
the  following  rule  may  be  set  down : 

It  is  practically  impossible  for  an  over- 
bought market  to  advance  materially,  or  for 
an  over-sold  market  to  decline  materially. 

This  seemingly  radical  statement  is  so  well 
based  as  to  be  operative  regardless  of  actual 

51 


52      THE  PITFALLS  OF  SPECULATION 

values.  That  is  to  say,  if  a  certain  stock  is  sell- 
ing at  sixty  and  is  intrinsically  worth  par,  it  is 
very  unlikely  that  it  will  reach  par  while  there 
exists  a  general  marginal  participation  for  the 
long  account;  and  on  the  other  hand,  a  stock 
which  is  selling  at  par  and  is  worth  only  sixty, 
will  not  decline  if  there  is  a  heavy  short  in- 
terest in  it. 

These  statements  may  at  first  blush  seem 
opposed  to  the  previous  contention  that  any 
security  must  eventually  seek  its  correct  level ; 
not  so,  for  the  fact  is  that  correct  levels  will 
finally  be  reached,  but  not  until  the  preponder- 
ance of  participating  opinion  has  been  equal- 
ized; or,  what  is  more  common,  exactly  re- 
versed. 

There  have  been  many  cases  where  the  bet- 
ter class  of  traders  have  made  a  strong  favor- 
ite of  a  certain  security,  and  have  been  wholly 
unable  to  account  for  its  dullness  or  depression. 
Frequently  their  original  deductions  have  been 
correct,  but  after  long  and  patient  waiting  for 
the  price  of  the  stock  to  readjust  itself  to  what 
they  correctly  considered  its  true  valuation, 
they  have  withdrawn  in  disgust,  or  have  even 
allowed  themselves  to  believe  that  there  must 
be  some  concealed  rottenness  about  the  affairs 


MARKET   TECHNICALITIES  53 

of  the  corporation  which  they  are  unable  to 
ferret  out. 

The  analysis  of  this  state  of  affairs  is  neither 
profound  nor  difficult.  First,  and  most  import- 
ant, is  the  fact  that  the  buying  power  which  is 
necessary  to  any  marked  advance  is  absent. 
The  public  having  made  a  favorite  of  the  stock, 
has  loaded  up  and  is  waiting  for  an  advance. 
The  public  buying  is  completed,  and  no  matter 
how  inviting  the  proposition  may  be,  so  far  as 
intrinsic  merit  goes,  the  big  men  will  not  buy 
while  this  public  interest  exists.  They  will  not 
participate  in  a  deal  which  contemplates  a  hoi 
polloi  partnership,  and  aside  from  this,  they 
are  aware  of  the  fact  that  they  can  certainly 
purchase  cheaper  in  time  if  the  present  holders 
are  left  to  their  own  devices. 

In  order  to  pursue  any  deal  looking  to  an 
advance  in  the  security  in  question,  the  pro- 
fessionals realize  that  should  they  enter  the 
lists  now  they  would  be  working  for  public 
benefit.  They  must  not  only  buy  in  a  re- 
stricted market  at  advancing  prices,  but  must 
be  prepared  to  take  over  at  higher  prices  the 
present  holdings  of  the  public. 

This  is  not  the  method  used  by  great  specu- 
lators ;  they  do  not  bid  for  and  assist  the  public 
in  its  speculative  affairs,  but  accept  at  low 


54      THE  PITFALLS  OF  SPECULATION 

prices  what  the  pubHc  is  throwing  away.  The 
professional  element  therefore  cannot  be 
counted  on  to  forward  prices.    They  will  wait. 

Meanwhile  the  numerous  friends  of  the 
stock  sit  and  twiddle  their  thumbs  and  wonder 
what  in  the  world  is  the  matter. 

This  state  of  affairs,  it  is  evident,  would  cure 
itself  in  time  through  the  certain  and  unstop- 
pable assertion  of  intrinsic  merit,  but  the  re- 
quired time  will  not  be  granted  by  the  im- 
patient holders.  Something  entirely  different 
(and  more  rapid)  will  occur.  The  impatient 
public  will  throw  over  its  stocks  in  disgust  one 
by  one,  and  each  decline  will  confirm  others  in 
the  belief  that  there  is  "something  rotten"  in 
the  stock.  It  being  impossible  to  uncover  or 
point  out  anything  detrimental,  something  is 
invented,  and  the  well-meant  plans  of  the  hold- 
ers end  in  a  general  decline,  and  after  a  time, 
in  the  hands  of  people  who  know  both  values 
and  methods,  the  stock  is  first  absorbed,  then 
galvanized  into  activity,  and  finally  hippo- 
dromed  back  into  public  hands  at  prices  higher 
than  they  had  first  figured  as  its  value. 

The  statements  made  above  are  not  calcu- 
lated to  encourage  the  public  trader.  It  cer- 
tainly looks  as  if  he  had  a  hard  row  to  hoe  when 
even  intrinsic  valuation,   correctly  estimated. 


MARKET   TECHNICALITIES  55 

/'will  not  always  produce  satisfactory  results; 
but  the  knowledge  of  this  important  technical 
condition  and  its  cause  and  effect  will  prove 
of  the  highest  value  to  the  trader.  He  may 
reason  as  follows :  I  have  figured  and  estimated 
the  value  of  this  security  and  find  it  to  be  too 
low,  but  unfortunately  it  is  a  public  favorite. 
Its  cheapness  is  so  apparent  as  to  attract  to  it 
a  large  following  incapable  of  either  patient 
waiting  or  sustained  action.  The  widespread 
nature  of  these  holdings,  and  the  character  of 
the  holders  render  any  concerted  action  for  a 
more  or  less  manipulated  advance  out  of  the 
question.  On  the  other  hand,  the  holders  who 
now  believe  in  the  stock  will  daily  grow  more 
impatient  at  its  torpidity,  and  will  eventually 
begin  to  liquidate.  This  will  be  followed  by 
numerous  canards  inimical  to  its  price,  and  the 
stock  will,  at  the  bottom  prices,  be  friendless  so 
far  as  the  public  is  concerned.  When  this  con- 
summation is  reached,  the  stock  will  rest  in  the 
hands  of  men  who  possess  all  the  qualifications 
of  speculative  success — patience,  money  and  a 
full  knowledge  of  how  to  start  the  machinery 
of  an  advance  at  the  right  time. 

In  following  this  reasoning  the  trader  is 
doing  exactly  what  the  great  inside  interests 
do,  and  if  he  refrains  from  purchasing,  even  at 


56       THE  PITFALLS   OF  SPECULATION 

low  prices,  when  a  security  is  too  popular,  he 
may  rest  assured  that  he  will  be  able  to  pur- 
chase more  cheaply  in  time.  The  chances  are 
a  hundred  to  one  that  no  safe  or  material  ad- 
vance will  occur  under  such  conditions.  The 
amateurs  and  the  professionals  cannot  win  on 
the  same  side  in  a  speculative  deal.  It  is  the 
survival  of  the  fittest,  and  the  trader  can  soon 
decide  with  which  side  he  wishes  to  identify 
himself.  On  the  one  hand  are  narrow  margins, 
over-speculation,  absolute  lack  of  method;  on 
the  other,  wealth,  knowledge,  concentration, 
and  organization. 

These  are  cold,  hard  facts  and  require  only 
the  directed  exercise  of  good  reasoning  to  be 
taken  advantage  of. 

The  same  rule  in  inverse  ratio  applies  to  an 
oversold  market,  except  that  the  danger  to  the 
seller  is  even  greater.  The  professionals,  a 
purely  speculative  party  with  whom  the  greater 
lights  of  speculation  do  not  hesitate  to  ally 
themselves  occasionally,  are  always  on  the 
lookout  for  an  over-sold  market,  and  the 
squeeze  they  sometimes  administer  to  a  wide- 
spread short  interest  is  very  severe. 

There  is  nothing  in  the  speculative  world 
more  hazardous  than  short-selling  in  a  numer- 
ous company. 


MARKET   TECHNICALITIES  57 

In  digesting  the  above  statements,  the  ques- 
tion naturally  arises :  "How  may  a  bad  techni- 
cal condition  be  recognized?"  This  is  not  so 
difficult  as  it  might  appear. 

It  is  first  necessary  to  lay  aside  any  precon- 
ceived personal  opinions  and  prejudices  bear- 
ing on  the  stock  in  question,  and  conduct  in- 
quiries unhampered  by  "the  wish  that  is  father 
to  the  thought." 

The  published  opinions  and  interviews  in  the 
newspapers,  the  expression  of  opinions  among 
the  speculators  generally,  and  if  possible,  a 
frank  inquiry  from  a  friend  at  court,  viz.:  a 
broker  who  has  means  of  knowing  whether  or 
not  a  widely  scattered  and  considerable  long 
or  short  interest  exists — will  usually  prove 
sufficient. 

A  successful  Western  trader  for  many  years 
gained  this  information  from  the  books  of  a 
single  large  private  wire  house  in  Chicago,  and 
claimed  that  he  found  the  method  an  infallible 
barometer,  and  that  he  would  frequently  find 
every  office  of  the  company's  system  on  one 
side  of  a  stock,  with  scarcely  a  single  trade  on 
the  other  side.  This  man,  whose  word  there 
is  no  reason  to  doubt,  made  the  interesting 
statement  that  at  the  approximate  high  prices 
of  Steel  Preferred  and  Amalgamated  Copper 


58       THE  PITFALLS   OF  SPECULATION 

he  found  that  the  long  account  in  these  two 
stocks,  representing  the  operations  of  a  large 
and  indiscriminate  public  trade,  exceeded  those 
of  all  other  stocks  combined,  without  a  single 
short  trade,  and  that  later  when  Steel  Pre- 
ferred had  sold  below  fifty  and  started  on  its 
upward  road,  there  was  not  one  of  the  hundred 
offices  in  the  system  whose  customers  were  not 
short  of  the  stock,  while  the  long  account  was 
limited  to  a  few  scattered  trades. 

Such  a  state  of  affairs  is  astonishing,  and 
were  it  not  for  a  realization  of  the  loss  and  suf- 
fering brought  about  by  such  widespread  folly, 
it  would  be  laughable. 

The  wide  general  swing  of  a  stock  market 
from  high  to  low  prices  is  marked  by  an  almost 
unvarying  set  of  extraneous  appearances  which 
may  be  used  to  advantage  by  the  observant 
trader. 

The  bottom  of  the  cycle  is  marked  by  dull- 
ness and  a  sawing  back  and  forth  in  narrow 
limits,  with  general  sympathizing  in  the  entire 
list.  The  successful  large  interests  are  ac- 
cumulating stocks  by  their  time  honored 
method  of  picking  up  offerings  and  bidding  for 
nothing.  When  this  extended  period  of  tor- 
pidity has  left  the  public  sufficiently  bare  of 


MARKET   TECHNICALITIES  59 

Stocks,  and  has  also  created  distrust  and  pessi- 
mism, the  advance  begins. 

The  beginning  of  a  bull  period  is  almost  al- 
ways marked  by  the  bidding  up  of  a  single 
stock,  and  is  followed  by  the  picking  up  of  one 
stock  after  another  until  the  entire  list  of 
values  has  been  materially  advanced.  There 
is  a  hazy  public  idea  that  a  bull  movement  is 
accompanied  by  a  general  advance  which  ex- 
tends to  all  active  securities.  This  is  not  shown 
by  any  precedent,  but  on  the  other  hand  the 
culmination  of  a  bull  market  is  marked  by  just 
such  a  general  advance.  This  may  be  ex- 
plained by  the  statement  that  the  genuine  and 
intermediate  advance  from  low  prices  to  the 
approximate  top  is  more  or  less  assisted  and 
engineered  by  the  inside  factors,  who,  however 
well  fortified  in  organization  and  funds,  would 
not  be  guilty  of  endangering  themselves,  (a  la 
public),  by  attempting  too  much  at  once. 
These  interests,  therefore,  concentrate  efforts 
and  capital,  and  lift  their  stocks  one  at  a  time, 
probably  returning  to  the  first  security  in  time, 
and  again  furthering  their  favorites  in  rotation. 
This  is  the  one  and  only  stage  of  a  market  in 
which  a  considerable  number  of  public  traders 
make  money,  for  the  appearance  of  one  stock 
after  another  advancing  sharply  is  so  glaring 


6o       THE  PITFALLS  OF  SPECULATION 

that  the  more  or  less  sophisticated  trader  learns 
to  recognize  the  appearance,  and  to  buy  a  stock 
the  minute  he  sees  it  "start,"  or  develop  sud- 
den activity.  This  period  is  the  brief  and 
golden  time  for  the  trading  element,  but  alas, 
they  either  over-speculate  so  rashly  that  the 
first  natural  reaction  or  engineered  shake-out 
lands  them  bottom  side  up,  or  they  absolutely 
refuse  to  recognize  that  there  is  a  top  to  a 
movement,  and  are  caught  with  a  large  line  at 
the  highest  prices. 

As  has  been  stated,  the  actual  culmination  is 
usually  marked  by  a  general  advance,  which 
means  that  the  public  has  entered  the  lists  in 
force,  and  are  buying  any  thing  at  any  price. 
This  is  the  exact  condition  for  which  the  in- 
siders have  worked  and  waited — a  broad  and 
general  market  for  their  holdings. 

Another  public  idea  is  that  in  the  course  of 
a  bull  market  from  one  extreme  to  the  other 
there  are  numerous  setbacks  and  shake-outs. 
There  is  nothing  in  history  to  show  that  this 
view  is  correct ;  such  declines  are  limited  to  one 
or  two  breaks  of  importance  during  the  pro- 
gress of  the  entire  cycle.  This  mistake  of  look- 
ing for  repeated  reactions  of  importance  is  an- 
other factor  which  works  against  the  public, 
for,  having  seen  one  or  two  shake-outs  follow- 


MARKET   TECHNICALITIES  6i 

ed  by  a  continuation  of  the  advance,  they  look 
for  an  indefinite  repetition  of  such  action,  and 
do  not  recognize  the  fact  that  there  will  even- 
tually be  a  decline  with  no  subsequent  advance. 

The  question  at  once  asks  itself:  "How  may 
the  top  of  the  market  be  discerned,  and  the 
dangers  of  the  eleventh  hour  be  avoided?" 
The  answer  is  more  or  less  complex. 

It  is,  of  course,  necessary  above  all  things  to 
revert  to  the  estimated  and  fixed  value  of  the 
stocks  traded  in  and  to  find  out  how  much 
above  this  normal  point  the  securities  are  sell- 
ing. This  done,  common  sense,  plus  prudence, 
and  minus  piggishness,  may  determine  the 
question  and  dictate  the  time  for  liquidation. 
This  action,  however,  once  decided  upon  must 
be  adhered  to  with  great  rigidity,  for  thous- 
ands of  traders  who  thus  take  time  by  the  fore- 
lock have  been  dissatisfied  afterwards  by  seeing 
a  still  greater  advance  in  which  they  had  no 
interests,  and  through  greed  and  impatience 
have  re-entered  the  lists  at  a  most  inopportune 
time. 

The  trader  who  realizes  his  profits,  and  sees 
a  further  advance  follow  his  own  withdrawal 
from  the  market,  may  console  himself  with  the 
fact  that  he  has  made  and  secured  a  profit; 
that  trying  to  guess  the  exact  extreme  of  a 


62       THE  PITFALLS   OF  SPECULATION 

cycle  is  hazardous,  and  that  the  advance  which 
followed  his  withdrawal  is  unsound,  being 
founded  on  speculation  rather  than  valuation. 

But  this  is  a  digression  from  the  technical 
phase  of  the  matter.  So  far  as  it  is  possible  to 
judge  the  culmination  of  a  speculative  cam- 
paign by  extraneous  appearances,  it  may  be 
said  that  a  long  period  of  backing  and  filling, 
a  swinging  back  and  forth  of  prices  at  the 
approximate  high  level  marks  the  beginning  of 
the  end.  This  is  occasioned  by  the  following 
facts : 

The  definition  of  the  "top"  of  a  market  is 
that  point  at  which  the  great  traders  have  al- 
most in  unison  decided  to  unload,  and  per 
contra,  the  public  has  reached  its  highest  de- 
gree of  enthusiasm..  At  the  beginning  of  this 
period  the  insiders  possess  an  enormous  ag- 
gregate of  stocks  which  must  be  sold  in  such 
a  manner  as  not  to  break  the  market.  This 
operation  will  take  weeks,  or  even  months  to 
accomplish,  as  any  precipitate  selling  would 
be  disastrous.  The  wise  element,  therefore, 
sells  all  the  market  will  absorb  without  any 
severe  decline,  and  ceases  selling,  or  even  takes 
the  buying  side  at  the  first  appearance  of  "soft- 
ness." In  short  they  do  all  they  can  to  main- 
tain a  good  feeling  and  high  prices,  at  the  same 


MARKET  TECHNICALITIES  63 

time  parting  with  securities  as  rapidly  as  pos- 
sible. 

This  statement  may  convey  the  impression 
that  the  shrewd  speculators  act  in  unison.  This 
is  true,  but  not  necessarily  in  the  sense  that 
there  is  any  preconceived  arrangement  between 
them..  The  unison  is  more  or  less  unconscious, 
and  is  founded  on  the  fact  that  there  are  only 
two  sides  to  the  market — the  right  side  and  the 
wrong  side,  and  that  those  of  the  speculative 
world  who  have  sufficient  wisdom  and  experi- 
ence to  know  what  is  right  are  working  to  the 
same  end,  while  all  the  inexperienced  or  un- 
thinking horde  are  working  on  theories  dia- 
metrically opposed  to  reason  or  even  proba- 
bility. 

A  careful  perusal  of  the  above  statements 
will  bring  out  the  following  stages  as  the  ap- 
pearance of  a  speculative  cycle : 

First,  a  long  period  of  dullness,  then  the 
rocketing  of  one  stock  after  another  until  the 
entire  list  has  been  greatly  advanced,  one  or  two 
shake-outs  (always  accompanied  by  specious 
excuses),  a  renewal  of  the  advance,  and  finally 
general  participation  and  a  long  period  of  "see- 
sawing." These,  so  far  as  precedent  goes,  are 
the  earmarks  of  a  bull  period,  and  may  be  ex- 
actly reversed  in  a  long  decline,  except  that  in 


64      THE  PITFALLS   OF  SPECULATION 

declines  the  general  list  is  more  greatly  af- 
fected; that  is  to  say,  the  whole  list  crumbles 
at  once. 

Aside  from  the  fundamental  principles  con- 
sidered above  there  are  numerous  minor  tech- 
nicalities which  are  of  value  to  active  traders, 
but  are  dangerous  and  not  wholly  dependable. 
For  instance,  the  appearance  of  strength  and 
heavy  buying  in  a  certain  security  in  a  low  and 
weak  market  is  almost  invariably  followed  by 
a  decided  advance  in  that  particular  stock. 
The  analogy  of  this  feature  is  that  this  un- 
natural moving  against  the  current  shows 
heavy  accumulation  for  some  reason  which 
will  probably  be  developed  later.  But  such  an 
appearance  in  a  high  market  might  mean 
exactly  the  reverse,  as  one  stock  may  be  bid 
up  sharply  to  permit  of  liquidation  in  a  dozen 
others  under  cover  of  the  sympathetic  good 
feeling  engendered  by  the  isolated  advance. 

The  minor  technicalities  are  of  use  only  to 
experienced  traders  who  have  every  facility  for 
acting  upon  them,  and  to  enlarge  upon  them  in 
a  work  of  this  character  would  be  to  run  the 
risk  of  being  misunderstood,  or  even  of  making 
statements  v/hich  might  be  misleading.  In 
view  of  this  fact,  and  also  as  they  are  not  of 


MARKET  TECHNICALITIES  65 

primary  importance,  any  discussion  of  them 
is  omitted. 

If  the  idea  has  been  conveyed  in  the  above 
statements  that  technical  conditions  or  appear- 
ances may  be  made  the  sole  groundwork  of 
speculative  operations,  let  the  impression  be  at 
once  corrected.  That  these  appearances  and 
conditions  exist,  and  that  they  can  be  made 
valuable  by  correct  application  there  is  no 
/doubt. 

doubt.  Every  affair  of  life  is  preceded  by 
certain  signs,  and  "coming  events  cast  their 
shadows  before"  in  the  stock  market  as  well  as 
in  other  affairs.  But  these  appearances  should 
be  made  use  of  as  valuable  adjuncts  to  more 
solidly  formed  opinions;  as  a  confirmation  of 
judgment  more  tangibly  adduced,  or  as  warn- 
ings of  possible  danger. 

Care  has  been  taken  to  present  nothing  in 
these  pages  which  cannot  be  analyzed  and  ex- 
plained, and  while  the  statements  made  are 
confirmed  by  both  logic  and  precedent,  they 
may  be  easily  contorted  or  abused. 


VII 

Tips 

THE    tip    may    be    briefly    described    as 
illogical. 

In  considering  this  statement  the  di- 
viding line  between  tips  and  information  must 
be  clearly  drawn,  for  one  is  frequently  found 
masquerading  in  the  habit  of  the  other. 

The  difference  may  be  acceptably  defined 
by  saying  that  a  tip  is  a  statement  that  certain 
market  movements  will  occur,  with  no  accom- 
panying reason  for  such  movement,  and  that 
information  points  to  the  expectation  of  move- 
ments, founded  on  demonstrable  probabilities. 

"Smith  says  to  buy  steel,"  is  a  tip;  "Smith 
says  that  the  price  of  steel  is  low  and  that 
earnings  are  increasing,"  is  more  or  less  in- 
formative. In  one  case  Smith  is  taken  on  faith 
and  in  the  other  his  statement  is  open  to  in- 
vestigation and  confirmation. 

The  illogical  character  of  tips  will  at  once 
be  apparent  to  the  student  of  technical  con- 
ditions.   The  large  operator  who  contemplates 
67 


68       THE  PITFALLS   OF   SPECULATION 

a  manipulated  movement  of  any  importance, 
even  if  such  movement  be  based  on  sound  rea- 
soning, jeopardizes  his  own  chances  of  success 
by  creating  a  public  following.  This  fact  is  so 
well  recognized  by  large  operators,  that  where 
a  projected  deal  is  discovered  by  too  many 
people  or  where  inside  intentions  have  leaked 
in  the  form  of  a  tip,  they  frequently  abandon 
their  plans  entirely  or  temporarily.  This  point 
has  already  been  discussed  under  the  head  of 
Technicalities,  but  is  here  reiterated  as  being 
pertinent  to  the  subject. 

The  promoter  of  a  certain  speculative  move- 
ment who  takes  the  public  into  his  confidence, 
is  therefore  either  foolhardy  or  insincere,  and 
the  ordinary  man  who  receives  a  tip  may  be 
sure  his  knowledge  is  public  property.  If  he 
has  good  reasons  for  believing  to  the  contrary 
and  that  he  is  the  recipient  of  valuable  and  cir- 
cumscribed information,  his  action  of  course 
depends  largely  on  his  confidence  in  his  pa- 
tron's ability  to  perform  what  is  promised.  He 
simply  acts  on  the  principle  that  the  capacity 
of  his  informant  is  superior  to  his  own,  and 
that  his  integrity  is  unquestioned. 

There  are  no  doubt  cases  where  manipulators 
have  put  into  circulation  a  whispered  word 
which  they  were  confident  would  travel  and  be 


TIPS  6g 

made  the  basis  of  considerable  buying  at  a 
period  when  they  wished  to  sell.  It  is  related 
of  the  late  Jay  Gould  that  when  approached  by 
the  pastor  of  a  rich  and  fashionable  New  York 
Tabernacle,  he  whispered  to  him  that  pur- 
chases of  Pacific  Mail  were  very  advisable,  and 
that  he,  Gould,  would  reimburse  him  from  his 
private  purse  if  operations  in  that  stock  re- 
sulted in  loss.  When  the  pastor  came  to  him 
later,  deeply  distressed  by  his  large  personal 
loss,  Mr.  Gould  was  as  good  as  his  word  and 
promptly  handed  him  a  check  to  cover  the  de- 
ficit. "But  how  about  my  parishioners?"  in- 
quired the  reverend  gentleman,  "yo^  placed  no 
ban  of  secrecy  upon  me,  and  their  losses  are 
enormous."  To  which  Mr.  Gould  replied 
calmly,  "They  were  the  people  I  was  after." 

Whether  or  not  the  story  is  true,  it  points 
a  moral. 

It  may  be  said  that  it  would  be  possible  for  a 
manipulator  to  create  public  buying  in  a  stock 
of  sufficient  volume  to  advance  prices  ma- 
terially, and  to  thus  assist  or  accomplish  his 
object.  This  has  been  done,  but  aside  from  the 
hazard  to  the  manipulator  himself  through 
being  in  the  company  of  an  easily  frightened 
herd,  which  he  could  not  control,  it  must  be 
admitted  that  the  advance  created  by  a  certain 


70      THE  PITFALLS  OF  SPECULATION 

amount  of  buying  must  be  offset  by  the  ensuing 
liquidation,  and  some  one  must  suffer. 

The  individual  who  imagines  himself  astute 
enough  to  evade  this  danger,  simply  flatters 
himself  that  he  is  wiser  than  his  fellows,  and 
even  if  he  is  justified  in  this  belief,  the  com- 
posite result  is  unchanged. 

The  great  majority  of  so-called  tips  are, 
however,  founded  on  nothing  better  than 
guesswork  or  pure  invention.  Although  value- 
less, openly  distributed  and  untraceable  to  any 
reliable  source,  they  are  always  clothed  in  a 
garb  of  mystery  and  importance  and  are 
capable  of  much  mischief,  for  there  is  a  consid- 
erable speculative  element  who  possess  no  in- 
dividual ideas  of  importance  and  who  will  act 
rashly  on  the  most  ill-founded  advice. 

If  the  distribution  of  such  advice  were 
limited  to  charlatans  and  mountebanks  the  ef- 
fects would  be  greatly  reduced,  but  many  of 
the  recognized  brokerage  concerns  load  their 
private  wires  with  just  such  matter  for  the 
purpose  of  creating  business,  usually  beginning 
their  messages  with  the  statement  that  "we 
have  it  from  a  good  source"  and  ending  with  a 
ridiculous  injunction  to  keep  it  dark.  This 
statement  is  not  lightly  made,  but  is  founded 
upon  proven  and  provable  fact.    The  statement 


TIPS  71 

does  not  in  any  way  reflect  upon  houses  which 
give  out  such  current  gossip  for  what  it  is 
worth  and  allow  the  patrons  to  decide  for 
themselves  what  is  wheat  and  what  is  chaff. 
Even  under  such  circumstances  the  dissemin- 
ation of  such  news  is  capable  of  harm,  but  the 
distributors  cannot  be  considered  culpable. 
They  are  merely  the  purveyors  of  news  un- 
accompanied by  comment  or  recommendation. 
The  brokerage  offices  of  the  country  are 
daily  visited  by  people  who  have  had  their  im- 
agination inflamed,  or  their  cupidity  aroused 
by  personal  ideas  or  exaggerated  stories  of 
speculative  possibilities.  As  they  possess  no 
special  knowledge  of  speculative  affairs  they 
are  soon  lost  in  a  maze  of  intricate  figures, 
which  not  being  understood,  are  productive  of 
nothing  but  indecision  and  mental  confusion. 
To  this  numerous  class  the  tip  at  once  appeals. 
Out  of  the  mass  of  conflicting  reports,  techni- 
calities and  evasions,  comes  the  terse  advice, 
"Buy  Southern  Pacific."  Here,  at  last,  is  some- 
thing definite,  and  its  air  of  being  confidentially 
imparted,  its  transmission  by  telegraph  from  a 
distant  city  by  a  great  brokerage  concern,  and 
its  decided  tone  combine  to  lend  it  an  import- 
ance which  it  in  no  way  possesses.  The  man 
who  wants  to  do  something,  but  does  not  know 


72       THE  PITFALLS   OF  SPECULATION 

what  to  do,  acts  upon  it  at  once,  and  even  the 
more  seasoned  traders  who  will  cheerfully  ad- 
mit that  tips  are  worthless,  are  moved  by 
advice  so  unimportant. 

And  right  here  a  word  in  regard  to  follow- 
ing the  advice  of  so-called  "leaders"  in  specu- 
lative shares  or  commodities.  Of  late  this  game 
of  follow  my  leader  has  been  more  or  less 
popular,  especially  in  the  cereals  and  in  cotton. 
Sometimes  the  outspoken  views  of  these  self- 
constituted  mentors  are  made  public  by  pub- 
lished interviews  or  even  by  means  of  paid 
advertisements,  in  which  emphatic  opinions 
and  advice  are  set  forth. 

This  form  of  public  invitation,  fathered  by 
names  of  more  or  less  importance  or  notoriety 
in  speculative  circles,  is  frequently  effective  in 
creating  a  considerable  following.  A  little 
analytical  thought  will  adduce  the  fact  that  the 
individual  who  invokes  such  a  following  must 
do  so  for  one  of  two  reasons:  either  because 
he  is  ignorant  of  the  necessary  ingredient  of  a 
successful  campaign  or  because  he  wishes  to 
sell  what  he  is  inviting  the  public  to  buy.  Take 
your  choice. 

Follow  mentally  the  operation  of  such  advice 
and  the  danger  is  most  apparent.  At  the  first 
sign  of  this  public  touting  the  men  of  weight 


TIPS  73 

and  importance  who  are  interested  in  the  stock 
or  commodity  involved,  far  from  welcoming 
such  assistance,  liquidate  their  holdings  quietly 
and  step  aside.  They  may  be  convinced  of  the 
merits  of  their  original  venture,  and  may  even 
admit  that  the  arguments  set  forth  by  the 
public  prophet  are  correct,  but  they  also  know 
that  his  advice  will  invariably  result  in  the 
commodity  recommended  passing  from  strong 
into  weak  hands,  a  fact  which  reduces  the 
chances  of  profit,  and  increases  the  danger  of 
decline,  or  even  panic. 

The  trader  who  believes  in  his  speculative 
Daniel  may  see  the  most  favorable  signs  for  a 
time,  but  he  may  ponder  on  this  fact:  that 
however  honest  his  prophet  may  be  in  his 
advice  he  will  not  publicly  express  himself  as 
to  a  consummation  or  reversal  of  his  ideas  and 
hopes  until  he,  himself,  has  liquidated. 

In  other  words,  after  the  aimable  instructor 
of  the  people  has  sold  to  his  own  followers  all 
he  possesses  he  may  bluffly  and  candidly  state 
that  he  has  sold  out,  and  advise  his  friends  to 
do  likewise  in  a  market  which  will  not  now 
absorb  their  composite  holdings. 

The  danger  in  such  a  campaign  as  that  illus- 
trated above  is  increased  just  in  proportion  to 
the    chief    promoter's    influence.      Each    new 


74       THE  PITFALLS   OF   SPECULATION 

public  follower  means  a  worse  condition  of 
affairs,  and  all  such  campaigns  have  finally 
terminated  in  disaster.  The  leader  of  these 
"come-on-boys"  affairs  is  always  a  tremendous 
gambler,  and  usually  an  unscrupulous  one. 

It  goes  without  saying  that  tips  are  fre- 
quently more  or  less  correct.  If  founded  on 
mere  guesswork,  the  chances  of  success  or 
failure  are  equal.  If  the  tip  failed  always  or 
even  in  a  large  majority  of  cases,  the  evil  would 
cure  itself,  but  the  percentage  of  satisfactory 
results  is  great  enough  to  encourage  its  de- 
luded followers. 

So  prevalent  is  this  practice  of  trading  on 
flimsy  advice  that  a  large  number  of  concerns 
dignified  with  the  title  of  "Information 
Bureaus"  have  recently  been  formed.  As 
these  concerns  continue  to  increase  in  number 
and  scope,  it  is  the  natural  presumption  that 
they  find  followers.  These  "Bureaus"  make 
extravagant  claims  of  inside  information  and 
advance  knowledge  of  certain  future  market 
movements  in  the  face  of  the  fact  that  no  man, 
great  or  small,  knows  positively  the  result  of 
even  one  day's  movement.  The  greatest  specu- 
lator or  manipulator  in  Wall  Street  may  enter 
the  arena  in  the  morning  confident  of  certain 
results,  and  leave  it  at  night  a  ruined  man. 


TIPS  75 

Nevertheless,  claims  of  accurate  foreknowl- 
edge by  these  mountebanks  find  a  resting  place 
in  the  minds  of  people  otherwise  intelligent.  It 
is  needless  to  add  that  the  tipping  bureau  ex- 
ploits its  correct  guesses  in  glowing  colors, 
and  maintains  a  dignified  silence  on  the  subject 
of  its  errors. 

The  man  who  invests  in  such  so-called  "in- 
formation" may  save  his  money  and  obtain  just 
as  good  results  by  basing  his  operations  on  the 
flipping  of  a  coin. 

The  concerns  criticized  above  are  in  no  way 
to  be  confounded  with  the  reliable  bureaus  of 
information,  of  which  a  few  are  in  existence. 
These  latter  are  exactly  what  their  names  sug- 
gest. They  gather,  compile  and  distribute  gen- 
eral news  on  speculative  matters,  and  are  use- 
ful to  the  active  trader  in  presenting  to  him 
statistical  results  involving  considerable  labor, 
and  general  news  which  might  have  been  over- 
looked. Such  bureaus  do  not  issue  tips;  they 
may  allude  to  the  existence  of  a  certain  tip, 
but  only  as  a  matter  of  current  gossip.  In  this 
regard  they  are  no  more  to  be  criticized  than 
the  editor  of  a  newspaper  who  prints  the  record 
of  a  murder. 

So  far  as  the  efficiency  of  the  tip  is  con- 
cerned as  shown  by  precedent,  it  may  be  dis- 


76       THE  PITFALLS   OF  SPECULATION 

missed  by  again  falling  back  on  the  statement 
that  no  sustained  speculative  successes  are 
traceable  to  its  use. 

The  tip  holds  no  dangers  for  the  man  who 
knows  because  he  has  taken  the  trouble  to  find 
out.  If  it  conflicts  with  his  well-grounded 
opinions  it  is  discarded  as  being  merely  an  un- 
supported statement,  and  opposed  to  more  de- 
pendable deductions.  If  it  accords  with  his 
opinions  it  is  of  no  value  as  it  is  merely  a  be- 
lated expression  of  what  he  already  knows. 
To  such  individuals  the  only  tangible  effect  of 
which  the  tip  is  capable  is  its  possible  stimu- 
lation to  investigation. 


VIII 

Mechanical  Speculation 

ANY    system    or    method    of    speculation 
which    is    founded    on    repetition,    or 
which   contemplates  ventures   founded 
entirely   on  certain  prices  being  reached  re- 
gardless of  conditions  or  values,  may  best  be 
described  as  mechanical. 

The  use  of  such  methods  is  extensive,  and 
even  where  no  set  figures  or  forms  are  em- 
ployed we  find  the  average  trader  continually 
harping  on  last  month's  or  last  years  low 
points  and  forming  for  himself  a  mental  chart 
by  which  he  is  frequently  induced  to  make 
commitments. 

Of  these  numerous  mechanical  methods  of 
speculation  only  two  possess  sufficient  merit  td 
warrant  serious  consideration.  These  two  ex- 
ceptions are  the  scale  order  and  the  stop  loss 
order,  both  of  which  may  be  made  useful  under 
certain  conditions.  That  these  methods  are 
frequently  abused  goes  without  saying.  They 
are  often  made  the  sole  basis  of  operations  in- 

77 


78       THE  PITFALLS   OF  SPECULATION 

Stead  of  adjuncts,  in  which  case  they  fail  of 
their  purpose. 

Either  method  is  useful  only  as  an  auxiliary 
to  sound  judgments  already  formed.  So  em- 
ployed they  possess  certain  merit  in  that  they 
permit  of  a  fixed  mechanical  arrangement  for 
accumulation  or  protection. 

The  contention  is  here  submitted  that  the 
scale  order  should  be  used  only  for  the  purpose 
of  acquiring  a  line  of  stocks  at  low  prices,  and 
the  stop  loss  order  for  the  protection  of  profits 
after  an  advance.  Otherwise  employed  they 
become  useless,  and  in  some  cases  even  assist 
in  producing  loss. 

The  intelligent  use  of  the  scale  order  con- 
templates the  purchase  of  a  certain  stock  or 
commodity  at  fixed  intervals  below  the  first 
purchase  price  until  the  total  proposed  pur- 
chase is  completed,  the  mechanical  principle  be- 
ing that  an  advance  of  one-half  the  decline  on 
which  the  purchases  are  made  leaves  the 
trader  without  loss,  and  the  broader  general 
principle  being  that  the  votary  of  the  method 
at  all  times  allows  for  declines  due  to  accidents 
or  errors  of  judgment.  If  such  declines  occur, 
he  gradually  acquires  his  line  at  a  lower  aver- 
age price  for  the  whole. 

As  an  example,  embodying  both  these  prin- 


MECHANICAL   SPECULATION  79 

ciples,  suppose  that  a  purchase  of  one  thousand 
shares  of  Union  Pacific  common  is  contem- 
plated. The  scaler  begins  his  purchases  at, 
say  100,  taking  one  hundred  shares  at  that 
price  and  entering  an  order  to  buy  one  hundred 
shares  at  fixed  points  below  the  first  price,  say 
for  instance,  at  99,  98,  97,  96,  95,  94,  93,  92  and 
91,  at  which  last  named  price  his  purchase 
would  be  completed  at  an  average  price  of 

95H. 

The  amount  to  be  purchased  on  each  de- 
cline, the  width  of  the  gap  between  declines, 
and  the  point  to  which  purchases  are  to  be  con- 
tinued are  of  course  matters  of  individual  deter- 
mination. The  principal  drawback  to  this 
method,  which  is  at  once  apparent,  is  the 
danger  of  the  original,  or  some  intermediate 
purchase,  being  made  at  such  a  low  point  as  to 
prevent  the  accumulation  of  the  proposed  line. 
In  the  extreme  case  of  only  the  initial  purchase 
having  been  possible,  the  trader  finds  himself 
with  a  profit  on  only  one  hundred  shares  of 
stock  where  he  had  intended  to  carry  one 
thousand. 

But  this  argument  against  the  merits  of  the 
method  may  be  answered  as  follows: 

The  average  speculator  may  safely  assume 
that  a  decline  from  the  point  he  considers  low 


8o       THE  PITFALLS   OF  SPECULATION 

is  probable.  If  he  happens  to  catch  the  low 
price  it  is  an  accident  and  not  because  of  his 
method,  whose  virtues  must  be  reserved  for 
future  usefulness.  He  may  congratulate  him- 
self on  an  unusually  fortunate  purchase  and  be 
satisfied  with  his  comparatively  small  but 
quickly  acquired  gains.  A  profit  is  a  profit,  and 
the  market  is  always  with  him.  On  the  other 
hand,  if  he  is  so  good  a  judge  of  the  market 
that  his  purchase  was  a  result  of  judgment 
rather  than  accident,  he  has  no  use  for  the 
scale  order  or  any  other  such  assistance. 

The  scale  order  is  frequently  misused  by 
depending  too  much  upon  inherent  virtues 
which  it  does  not  possess.  That  is  to  say,  it 
is  made  the  basis  of  operations  which  are  in- 
dulged in  more  on  a  belief  in  the  merits  of  the 
method  than  on  any  intelligently  formed 
opinion  of  the  probable  action  of  the  stock,  or 
a  sufficient  consideration  of  actual  value,  tech- 
nical conditions,  etc.  The  probabilities  of  an 
advance  equal  to  half  the  preceding  decline  is 
upheld  by  precedent  and  makes  the  method  al- 
luring, but  granting  such  an  advance,  and  no 
more,  nothing  has  been  gained  when  it  ma- 
terializes. 

In  short,  it  may  be  said  that  the  scale  order 
used  as  a  basis  for  poor  purchases  is  generally 


MECHANICAL   SPECULATION  8i 

useless.  So  employed  it  differs  from  ordinary 
methods  only  in  the  fact  that  it  will  take  the 
trader  a  little  longer  to  lose  his  money. 

But  he  who  admits  that  natural  market  ac- 
tion, manipulation  or  accident  render  it  im- 
probable that  even  a  careful  study  of  his  in- 
tended venture  will  find  for  him  the  lowest 
price  and  who  wishes  to  adopt  a  methodical 
plan  of  operation — for  him  the  scale  order  pre- 
sents some  very  favorable  features,  and  is 
recommended  for  serious  consideration. 

The  study  of  precedent  will  show  that  the 
scaling  method  could  have  been  successfully 
employed  in  almost  every  standard  listed  se- 
curity. In  fact  precedent  will  show  entirely 
too  much,  in  that  it  presents  the  fact  that  the 
method  carried  out  indefinitely  would  seldom 
have  resulted  in  loss  from  any  point,  high  or 
low.  Even  taking  the  worst  possible  example, 
a  stock  so  greatly  inflated  and  so  widely  dis- 
credited as  Amalgamated  Copper,  scaling  from 
its  extreme  high  price  of  130  in  1901  to  the  ex- 
treme low  price  of  335^  in  1903  would  give  an 
average  price  of  82,  a  point  recently  exceeded 
in  market  prices. 

But  such  figuring  as  this  is  useless.  An 
extended  campaign  of  this  kind  contemplates 


82       THE  PITFA-LLS  OF  SPECULATION 

the  use  of  a  vast  sum  of  money,  always  avail- 
able in  cash. 

The  danger  of  pursuing  statistics  so  alluring 
as  those  presented  by  a  study  of  past  market 
movements  as  applied  to  the  scaling  process  lies 
in  pointing  to  what  money  can  do  rather  than 
what  it  should  do,  and  in  indulging  in  mental 
and  statistical  proofs,  the  actual  operations  of 
which  are  past  the  possibilities  of  the  purse. 
Even  if  the  financial  equation  is  granted,  few 
men  possess  the  stability,  patience  and  courage 
to  adhere  to  the  rules  of  such  an  extended  and 
unsatisfying  campaign,  and  without  such  ad- 
herence the  whole  structure  falls  to  the  ground. 

The  best  use  that  can  be  made  of  the  scale 
order  is,  therefore,  to  use  it  only  for  the  me- 
thodical making  of  purchases  already  deemed 
advisable.  If  the  first  purchase  by  this  method 
is  made  at  the  point  at  which  prior  investigation 
and  judgment  has  pointed  out  as  the  time  to 
buy,  irrespective  of  any  inherent  virtues  which 
may  lie  in  the  scaling  process,  it  can  seldom  re- 
sult in  injury,  and  will  generally  prove  bene- 
ficial. If  the  method  is  adopted  it  must  be  ad- 
hered to  rigidly,  unless  for  some  good  reason 
the  deal  is  abandoned  entirely.  In  the  majority 
of  cases  this  is  not  done,  the  operator  for  some 
reason,  impatience,  greed,  or  fright,  changing 


MECHANICAL   SPECULATION  83 

his  plans,  in  which  case  the  usefulness  of  the 
method  is  impaired  or  eliminated. 

The  stop  loss  order  is  one  of  the  most  abused 
of  the  methods  employed  by  traders,  for,  like 
the  scale  order,  it  is  frequently  used  at  the 
wrong  periods,  or  given  credit  for  too  much 
inherent  virtue. 

In  speaking  of  this  method,  no  reference  is 
made  to  the  stop  order  as  employed  by  brokers 
for  self-protection,  in  which  case  it  is  a  matter 
of  necessity.  The  point  to  be  considered  is  its 
value  when  used  voluntarily  by  the  trader  for 
his  own  benefit. 

There  is  an  axiom  among  traders  that  the 
best  principle  in  speculation  is  to  take  small 
losses  and  large  profits.  So  popular  is  this 
axiom  that  many  speculators  consider  it  the 
great  secret  of  success,  and  in  following  it  em- 
ploy the  stop  loss  order  continually  in  a  most 
haphazard  manner. 

The  expressed  theory  of  small  losses  and 
large  gains  sounds  good  and  is  all  very  well  in 
itself,  but  it  may  be  relegated  entirely  to  a  class 
who  wish  to  gamble  on  quotations  on  a  re- 
versal of  ordinary  public  methods,  which  is  to 
take  large  losses  and  small  profits.  The  small 
loss  trader  pins  his  faith  wholly  to  the  belief 


84       THE  PITFALLS   OF  SPECULATION 

that  a  market  will  swing  not  to,  but  past  the 
point  where  he  placed  his  stop  loss. 

On  this  theory  all  intelligent  figuring  as  to 
the  probable  future  movements  is  eliminated, 
and  the  success  is  based  wholly  on  mechanical 
chance,  in  which  case  the  probability  of  loss 
and  gain  is  exactly  the  same;  that  is  to  say, 
the  probability  of  ten  losses  of  one  point  each, 
or  one  gain  of  ten  points,  is  the  same.  Those 
who  combat  the  truth  of  this  statement  at  once 
array  themselves  as  opposed  to  the  expressed 
and  accepted  consensus  of  opinion  of  the 
world's  greatest  students  of  the  doctrine  of 
mathematical  chance. 

To  contend  that  any  element  of  intelligent 
forecast  of  market  movement  could  be  com- 
bined with  the  use  of  the  small  loss  theory  as 
outlined  above,  is  untenable,  for  if  a  purchase 
is  made  because  research  has  shown  such  pur- 
chase warranted  by  conditions  and  the  price  of 
the  stock,  we  find  the  stop  loss  trader  in  the 
ridiculous  position  of  selling  his  holdings  be- 
low a  price  he  first  considered  should  be  cheap, 
at  which  point  he  should  in  reality  be  con- 
templating further  purchases. 

So  rooted  in  some  minds  is  the  principle  of 
small  loss  and  large  gain,  that  an  attack  on  the 
virtues  of  such  a  proceeding  will  no  doubt  be 


MECHANICAL  SPECULATION  85 

bitterly  contested.  The  argument  against  it 
however,  is  sound;  it  is  purely  mechanical, 
cannot  be  combined  with  intelligent  operations, 
has  no  marked  success  to  its  credit,  and  is  not 
adopted  by  successful  traders,  i.  e.  those  who 
buy  because  they  consider  a  thing  too  low,  and 
sell  because  they  consider  it  too  high. 

But  there  are  certain  periods  when  the  use  of 
a  fixed  limitation  of  decline  is  entitled  to  con- 
sideration. The  trader  may  find  himself  in 
possession  of  certain  profits  in  a  market  which 
is  high,  but  which  his  judgment  tells  him  may, 
for  technical  or  other  reasons,  still  advance 
materially.  At  such  a  period  he  may  wish  to 
provide  against  accident,  or  a  vicious  raid  by 
placing  stop  loss  orders  below  his  holdings  at 
a  point  which  will  insure  him  the  bulk  of  his 
profit,  advancing  the  point  at  which  loss  shall 
be  stopped  as  the  market  advances. 

Taken  the  year  round,  the  chance  of  loss  or 
profit  from  stich  a  course  is,  as  has  been  stated, 
demonstrably  equal;  but  in  the  case  of  high 
prices,  the  extraneous  dangers  of  accident  or 
manipulation,  and  the  advisability  of  protect- 
ing profits  by  systematic  orders  contemplating 
such  dangers,  the  placing  of  stop  orders  is 
frequently  useful.  Even  at  such  periods  its 
principal  virtue  lies  in  the  pre-arrangement  of 


86       THE  PITFALLS  OF  SPECULATION 

a  desirable  course  which  might  be  disturbed 
by  mental  confusion  or  personal  absence. 

It  is  a  debatable  question  whether  it  would 
not  be  better  to  buy  when  conditions  and 
prices  show  that  purchases  are  warranted,  and, 
per  contra,  to  liquidate  when  danger  threatens 
or  when  prices  look  high  enough.  But  to  most 
traders  systematic  arrangement  is  desirable,, 
and  to  some  minds  absolutely  necessary. 

As  recommended  above,  the  scale  order  and 
stop  loss  order  in  no  way  interfere  with  the 
workings  of  study  and  judgment,  and  are  fre- 
quently employed  by  traders  whose  opinions 
are  entitled  to  respect.  Let  the  fact  be  taken 
to  heart  however,  that  employed  as  a  means  of 
speculation,  rather  than  as  an  aid  to  it,  neither 
method  possesses  any  merit  whatever. 

"Chart  System" 

There  is  an  incredibly  large  number  of 
traders  who  pin  their  faith  to  the  so-called 
"chart  system"  of  speculation,  which  recom- 
mends the  study  of  past  movements  and  prices, 
and  bases  operations  thereon.  So  popular  is 
this  plan  that  concerns  which  make  a  business 
of  preparing  and  issuing  such  charts  do  a 
thriving  business. 


MECHANICAL  SPECULATION  87 

The  theory  propounded  is  that  history  re- 
peats itself,  and  that  because  a  property  sold 
at  a  certain  low  price  on  some  previous  occa- 
sion and  then  advanced,  the  same  thing  will 
occur  again!  There  are  various  offshoots  and 
modifications  of  the  system,  but  the  basic  plan 
is  founded  wholly  on  repetition,  regardless  of 
actual  conditions.  The  idea  is  absolutely 
fatuous,  entirely  untrustworthy,  and  highly 
dangerous.  The  study  of  the  past  is  interest- 
ing and  instructive  in  showing  what  may  be 
expected  in  the  way  of  general  movements,  but 
when  we  are  asked  to  throw  reason  and  re- 
search to  one  side  in  favor  of  only  half-demon- 
strated repetitions,  the  theory  becomes  unten- 
able. 

The  chart  traders  would  have  us  pore  over 
musty  records  of  past  movements,  and  have 
us  buy  a  stock  at  a  certain  price  because  it  sold 
there  before,  without  stopping  even  to  investi- 
gate the  fact  that  conditions  in  that  particular 
stock  have  changed  materially.  The  votary  of 
this  plan  might  find  himself  cheerfully  buying 
the  shares  of  a  bankrupt  and  ruined  corporation 
in  its  very  process  of  financial  disintegration,  or 
on  the  other  hand  might  refrain  from  purchases 
at  very  low  prices  because  it  sold  at  still  lower 
prices  on  some  previous  occasion. 


88      THE  PITFALLS  OF  SPECULATION 

Another  class  of  retrospective  speculators 
base  their  operations  on  seasons,  or  even  cor- 
responding weeks  and  months,  forming  their 
opinions  on  insufficient  research,  or  on  nothing 
at  all.  If  there  were  in  truth  any  certain  period 
of  the  year  or  month  from  which  movements 
would  occur,  the  whole  world  would  know  it, 
and  such  knowledge  would  reverse  expecta- 
tions by  the  rotten  technical  conditions  it 
would  create. 

It  is  useless  to  enlarge  upon  the  various 
methods  employed  by  the  mechanical  traders, 
for  they  are  all  alike  in  that  they  resolve  the 
whole  speculative  structure  into  a  gambling 
machine,  with  a  large  percentage  against  the 
player.  To  the  large  number  of  people  who 
risk  their  money  in  this  manner,  and  who  con- 
tend that  there  is  no  use  in  trying  to  accurately 
forecast  probable  movements  by  actual  investi- 
gation, let  the  following  statement  be  made : 

The  man  who  buys  a  stock  at  fifty  dollars 
a  share  because  he  has  good  reasons  for  believ- 
ing that  it  is  worth  one  hundred  dollars,  or 
who  sells  at  one  hundred  dollars  on  account  of 
having  good  reasons  for  believing  it  worth  only 
fifty  dollars,  is  the  only  man  in  the  speculative 
world  who  succeeds. 

When  the  study  and  thought  necessary  to 


MECHANICAL.  SPECULATION  89 

forming  such  conclusions  intelligently  are 
eliminated  in  favor  of  any  or  all  other  methods, 
the  colossal  error  is  made  of  expurging  from 
the  plan  of  operations  the  only  possible  chance 
of  sustained  success,  the  great  basic  principle 
to  which  all  other  knowledge,  technical  or 
statistical,  is  purely  subsidiary. 


IX 

Short  Selling 

THE  practice  of  short  selling,  which  was 
formerly  largely  confined  to  the  pro- 
fessional element,  has  of  late  years  be- 
come quite  fashionable  among  those  members 
of  the  trading  public  who  speculate  regularly, 
and  has  been  even  more  disastrous  than  have 
ventures  for  the  long  accounts. 

The  basis  for  this  action,  and  the  growing 
popularity  of  the  short  side  is  founded  on 
natural  pig-headed  pessimism  which  will  listen 
to  no  argument,  and  is  incapable  of  clear  rea- 
soning; or  what  is  more  common,  on  conten- 
tions so  shallow  and  silly  that  it  seems  super- 
fluous to  record  them  on  a  printed  page. 

Everywhere  one  hears  the  belief  expressed 
that  the  "big  money"  is  made  on  the  short  side, 
and  that  the  greatest  inside  speculators  are 
Bears.    This  view  is  entirely  erroneous. 

One  of  the  favorite  arguments  of  the  public 
bear  element  is  as  follows :  the  public  generally 
buys,  and  the  public  generally  loses  money. 

91 


92       THE  PITFALLS   OF  SPECULATION 

Therefore  the  buying  side  is  the  losing  side 
and  the  short  side  is  the  winning  side.  By  this 
absurd  and  wholly  unfounded  deduction  many 
bears  are  created. 

Now,  the  fact  of  the  matter  is  that  the  for- 
tunes made  on  the  short  side  of  stocks  are  few 
and  far  between,  while  those  accumulated  by 
judicious  operations  on  the  long  side  are  legion. 
The  public  loses  its  money,  not  because  it  pur- 
chases, but  because  its  purchases  are  made  at 
the  wrong  periods  and  its  methods  of  operation 
are  bad. 

The  accumulated  wealth  of  the  Vanderbilts, 
Rockefellers,  Astors  and  Goulds  has  accrued 
from  the  continued  increase  in  the  valuation  of 
properties  in  which  they  were  interested. 
True,  all  these  lights  of  finance  have  been 
justly  accused  at  times  of  operating  for  lower 
prices.  This  is  particularly  true  of  the  late  Jay 
Gould,  who  was  widely  known  as  a  wrecker. 
But  the  wrecking  operations  were  solely  for 
the  purpose  of  driving  other  holders  out  of  a 
certain  corporation  and  creating  a  sentiment 
and  condition  which  would  permit  of  the  pur- 
chase of  a  controlling  interest  in  the  corpo- 
ration in  question  at  low  prices. 

So  few  have  been  the  individuals  who  oper- 
ated on  the  short  side  habitually  and  success- 


SHORT  SELLING  93 

fully  that  the  names  of  Travers  and  Cammack 
stand  out  in  bold  relief  among  the  horde  of 
great  traders,  and  the  operations  of  the  suc- 
cessful minority  were  carefully  calculated  as 
to  periods  and  safety.  Their  skillful  work  and 
clear  foresight  would  probably  have  made 
more  money  for  them  if  their  operations  had 
been  reversely  conducted. 

"It  took  me  ten  years,  and  cost  me  two  for- 
tunes to  become  an  optimist,  but  it  was  worth 
all  it  cost,"  said  a  successful  speculator  of  to- 
day, and  in  that  terse  sentence  is  much  food 
for  thought.  It  is  possible  to  make  money  on 
the  short  side  of  the  market,  but  it  is  very  dif- 
ficult, and  the  man  who  is  capable  of  acting 
with  enough  judgment  and  decision  to  accumu- 
late gains  working  against  the  current  is 
doubly  capable  of  succeeding  by  swimming 
with  it. 

The  semi-professional  traders  who  trade  on 
the  short  side,  as  a  rule,  exercise  no  more 
judgment  or  study  of  actual  valuation  than  do 
the  army  who  purchase  They  are  moved  by 
blue  talk  and  general  pessimism,  and  sell  at 
the  bottom  and  are  frightened  out  at  the  top. 
Their  operations  are  simply  bad  in  inverse 
ratio.  There  is  one  difference:  the  purchaser 
who  has  the  means  and  patience  to  stand  by  an 


94       THE  PITFALLS   OF   SPECULATION 

ill-timed  purchase  will  eventually  see  daylight, 
while  there  is  no  certainty  of  this  desirable  con- 
summation for  the  bear.  On  the  other  hand,  he 
may  see  his  venture  grow  more  and  more  dis- 
astrous as  time  and  the  advance  of  the  country 
increases  the  value  of  the  stock  he  has  sold. 
The  cycles  of  speculation  will  of  course  bring 
him  occasional  hope,  but  these  cycles  occurring 
from  a  gradually  ascending  pivotal  point  carry 
him  further  from  his  original  price  at  each 
revolution. 

The  short  seller  of  stocks  has  against  him 
at  all  times  the  natural  future  enhancement  of 
values,  and  more  specifically,  the  earnings  and 
dividends  of  the  securities  in  which  he  trades. 

To  make  this  more  clear  let  us  say  that  one 
hundred  shares  of  a  certain  stock,  paying  6%, 
are  sold  short  at  par,  its  normal  price,  and  the 
commitment  endures  for  one  year.  For  the 
sake  of  argument  all  speculative  movements 
will  be  eliminated,  and  the  assumption  made 
that  at  the  end  of  the  year  the  selling  price 
of  the  stock  is  still  par.  It  will  be  seen  that  the 
seller  has  had  his  account  charged  with  six 
hundred  dollars  in  dividends,  and  thus  while 
there  has  been  no  advance  in  the  posted  value 
of  his  stock,  he  has  lost  six  hundred  dollars. 

This  does  not  hold  good  in  the  case  of  a  pur- 


SHORT  SELLING  95 

chase,  for  even  if  the  high  rate  of  6%  is  paid 
on  the  unmargined  balance,  these  charges  are 
covered  by  the  dividends  credited  to  the  stock, 
and  the  normal  gain  of  6%  has  been  made  on 
the  actual  money  deposited  as  margin. 

For  example:  one  hundred  shares  oi  a  6% 
stock  purchased  at  par  on  ten  points  margin, 
and  sold  at  the  same  price  one  year  later,  shows 
as  follows: 

Total  purchase  price  of  stock $10,000 

Marginal  deposit '  1,000 

Unpaid  balance $9,000 

Int.  for  I  yr.  at  6%  on  unpaid  bal.$540 
Credit  account  dividends 600 

Credit  balance = $60 

Or  6%  on  the  thousand  dollars  actually  in- 
volved. 

And  on  the  other  hand: 

One  hundred  shares  of  the  same  stock  sold 
at  par  and  re-purchased  at  the  same  price  one 
year  later: 

Total  credit  from  sale  of  stock $10,000 

Total  debit  from  purchase $10,000 

Debit  for  one  year's  dividends. .        600 

A  loss  of  $600.    If  it  is  presumed  that  one 


96       THE  PITFALLS  OF  SPECULATION 

thousand  dollars  has  been  deposited  as  mar- 
gins, on  which  amount  an  allowance  of  6% 
has  been  made  by  the  broker,  there  is  still  a 
net  deficit  of  $540,  with  no  adverse  market 
action. 

In  the  above  examples  no  account  is  taken 
of  commission  charges,  but  the  exhibit  is  in  no 
wise  affected  by  this  omission,  as  the  commis- 
sion charges  on  the  short  side  would  increase 
the  loss  on  that  commitment  exactly  as  much 
as  it  decreases  the  gain  on  the  purchase. 

It  will  be  seen,  therefore,  that  the  short  seller 
has  working  against  him  at  all  times  a  tangible 
effect  capable  of  exact  demonstration.  The  con- 
tention is  sometimes  made  that  short  commit- 
ments are  seldom  carried  for  any  considerable 
period,  and  that  the  man  who  sells  short  to- 
day and  re-purchases  tomorrow,  escapes  this 
onus.  This  view  is  so  shallow  that  it  is  unneces- 
sary to  state  to  thinking  men  that  the  differ- 
ence is  wholly  a  matter  of  degree,  and  that  the 
Bear  in  dividend  paying  shares  swims  con- 
stantly against  the  current. 

What  is  true  of  one  year  is  equally  true  of 
one  day,  and  repeated  short  time  operations 
multiply  the  infinitesimal  drawback  until  it  is 
as  great  as  when  lumped  on  one  longer  con- 
tract. 


SHORT  SELLING  97 

And  the  seller  of  non-dividend  paying  stocks 
is  no  better  off,  for  he  combats  either  the  earn- 
ings which  are  accruing,  or  the  gradual  en- 
hancement of  the  stock  through  a  wise  dis- 
tribution of  these  earnings.  In  short,  whether 
a  habitual  short  seller  sells  dividend  or  non- 
dividend  paying  shares  he  tampers  continually 
with  progress.  He  makes  his  venture  on  the 
side  of  disaster,  accident,  dishonesty,  misman- 
agement, and  pessimism,  rather  than  on  the 
side  of  gradual  improvement  in  the  business 
affairs  and  conditions  of  the  country. 

Another  pitfall  which  besets  the  short  seller 
is  the  danger  of  deliberate  cornering,  or  of  a 
fight  for  control  in  his  stock.  Tremendous  ad- 
vances are  possible  in  either  case,  and  even  if 
his  sales  have  been  made  at  high  prices  he 
faces  this  hazard.  The  plea  that  such  great 
twists  are  infrequent  will  not  do,  for  to  be  over- 
taken by  one  such  squeeze  in  a  decade  is  suf- 
ficient to  wipe  out  a  great  portion,  or  all,  of  the 
accumulated  gains  of  that  period. 

Concentration  of  wealth  and  power  make 
such  upward  manipulation  more  possible  from 
day  to  day,  and  this  latter  statement  develops 
another  argument,  and  another  important  fact 
in  answer  to  that  argument. 

The  argument  is  simply  that  history  shows 


98       THE  PITFALLS   OF  SPECULATION 

that  severe  breaks,  and  drives  against  certain 
stocks  have  been  made  more  frequently  than 
comers  or  squeezes.  Drives  have  been  made 
against  a  certain  stock  which  in  a  few  days 
carried  that  stock  to  ridiculously  low  figures, 
and  later  it  was  re-purchased  by  the  same  in- 
terest which  wrought  the  havoc  in  values. 

This  is  admitted — as  a  record  of  the  past. 
Such  action  is  out  of  the  question  today.  The 
method  is  pursued  to  some  extent,  but  great 
declines  in  a  brief  period  no  longer  come  from 
savage  individual  attacks  on  certain  securities. 
The  reason  for  this  is  simple;  the  concentra- 
tion of  capital  mentioned  above,  makes  such 
action  too  hazardous.  There  was  a  time  when 
Mr.  Keene  would,  for  a  single  great  interest, 
pound  the  price  of  Sugar  off  twenty,  thirty,  or 
forty  points  in  a  day  or  two,  and  then  re-pur- 
chase it  at  low  figures.  Mr.  Keene  will  never 
do  it  again,  for  the  enormous  sales  necessary 
to  accomplish  this  coup  would  place  him  and 
his  sponsors  in  danger  of  losing  control  of  the 
stock.  There  are  now  other  powerful  interests 
well  enough  aware  of  the  value  of  Sugar  stock 
which  would  welcome  any  opportunity  of 
wresting  the  control  from  present  hands,  and 
if  the  well-named  manipulator  were  to  do  to- 
day what  he  did  even  a  decade  ago,  he  would 


SHORT  SELLING  99 

wake  up  some  morning  not  only  minus  the 
control  of  the  property,  but  opposed,  in  a 
market  sense,  to  interests  even  more  powerful 
than  those  he  represented. 

This  places  the  moneyed  speculative  inter- 
ests in  the  position  of  allowing  public  folly, 
rather  than  individual  efforts,  to  bring  about 
great  declines  and  low  prices,  under  which  con- 
dition the  danger  of  losing  control  is  a  matter 
of  vigilance  and  a  matching  of  wits,  or  possibly 
a  community  of  interests  against  this  same 
public. 

There  is  no  gainsaying  the  fact  that  it  is  pos- 
sible to  so  accurately  judge  of  values  and 
periods  as  to  make  money  on  both  sides  of  a 
market  cycle,  but  those  who  have  been  suc- 
cessful iix  so  doing  may  be  numbered  on  the 
fingers. 

The  frequently  quoted  aphorism  of  a  great 
latter  day  speculator :  "If  it's  a  good  sale  at  all 
it's  a  good  short  sale,"  meaning  that  if  one  is 
justified  in  selling  holdings  to  realize  profits, 
he  is  also  justified  in  selling  short,  will  not  bear< 
the  light  of  calm  analysis. 

There  is  a  vast  difference  between  accepting 
accumulated  profits,  and  being  absolutely  free 
from  further  risk  with   an  acquired   gain   in 


200    THE  PITFALLS  OF  SPECULATION 

bank,  and  being  in  a  position  to  lose  heavily 
through  market  action. 

In  view  of  the  above  facts  it  would  appear 
that  for  the  speculator  in  the  ordinary  walks 
of  life,  the  safest  course  is  to  confine  operations 
to  purchases  of  stocks  when  they  are  cheap, 
and  to  limit  sales  to  the  realizing  of  profits. 
This  course  necessitates  periods  of  non-partici- 
pation which  are  decidedly  beneficial.  It  per- 
mits the  operator  to  look  with  an  unprejudiced 
eye  upon  market  actions,  frees  him  of  a  direct 
percentage  working  against  him  in  dividends 
and  earnings,  and  best  of  all,  maps  out  for  him 
a  fixed  and  settled  plan  of  operations,  con- 
ducted with  the  current  of  irresistible  improve- 
ment and  certain  accretion. 


What  500  Speculative  Accounts  Showed 

AN  examination  of  almost  four  thousand 
speculative  accounts,  extending  over  a 
period  of  ten  years,  developed  results 
interesting  and  instructive  in  many  ways.  The 
examination  was  of  an  exhaustive  character, 
and  covered  operations  of  every  conceivable 
nature  in  both  stocks  and  cereals. 

In  these  accounts  all  the  errors  of  specula- 
tion were  distinctly  illustrated. 

The  three  principal  points  developed  by  the 
investigation  were  that  80%  of  the  accounts 
showed  a  final  loss;  that  the  tendency  to  buy 
at  the  top  and  sell  at  the  bottom  was  most 
prevalent;  and  that  most  of  the  operations  ap- 
peared to  be  of  a  purely  gambling  character. 
The  further  fact  was  established  that  success 
almost  invariably  led  to  excesses. 
The  mass  of  figures  derived  from  so  exten- 
xoi 


102     THE  PITFALLS   OF  SPECULATION 

sive  an  examination  being  voluminous  and 
complicated,  it  was  considered  advisable  to 
simplify  the  matter  for  presentation  in  this 
work,  pursuant  to  which  decision,  the  following 
plan  was  hit  upon. 

It  was  decided  to  use  for  illustration  a  single 
stock,  trading  in  which  predominated  in  the 
operations  covering  a  certain  period.  In  order 
that  the  illustration  should  be  perfectly  fair  it 
was  decided  to  make  the  period  begin  and  end 
with  the  stock  considered,  selling  at  the  same 
approximate  price. 

As  U.  S.  Steel  Common  offered  the  best  illus- 
tration, 500  accounts,  either  confined  to  oper- 
ations in  this  stock,  or  showing  a  large  per- 
centage of  deals  in  that  security,  were  selected. 
The  period  originally  contemplated  was  from 
January  to  December  of  the  year  1901,  but  was 
discarded  on  the  theory  that  the  results  shown 
would  be  abnormal,  owing  to  the  panic  of  May 
ninth  of  that  year.  It  might  be  contended  that 
the  tremendous  losses  sustained  in  this  panic 
were  offset  by  the  unusual  opportunities  for 
purchases  at  low  prices,  but  as  few  purchases 
were  shown  it  was  thought  best  to  seek  a 
period  during  which  nothing  abnormal  oc- 
curred, but  which  presented  numerous  ad- 
vances and  declines  of  an  ordinary  character. 


WHAT  SPECULATIVE  ACCOUNTS  SHOW  103 

Such  a  condition  existed  from  July,  1901,  to 
March,  1903,  during  which  time  there  were 
numerous  advances  and  declines  in  Steel  Com- 
mon ranging  between  29^  and  46%.  In  July, 
igoi,  the  stock  sold  at  37,  and  in  March,  1903, 
it  touched  the  same  price,  and  as  the  price  at 
the  beginning  and  ending  of  the  period  is  the 
same,  and  furthermore  is  nearly  midway  be- 
tween highest  and  lowest  prices,  it  would  ap- 
pear that  about  equal  chances  had  been  pre- 
sented for  profit  or  loss  if  the  element  of 
knowledge  and  mental  acumen  were  cancelled. 

In  other  words,  viewed  wholly  as  a  gambling 
proposition  the  chances,  not  considering  the 
percentage  of  commissions,  were  about  equal. 
The  reason  for  making  this  comparison  will  be 
apparent  later. 

The  books  of  the  different  firms  showed  a 
marked  unanimity  of  public  action  at  all  times, 
reflecting  a  general  consensus  of  opinion.  This 
applied  not  only  to  the  500  accounts  chosen  for 
this  illustration,  but  to  all  which  were  origin- 
ally examined. 

In  selecting  these  500  accounts  every  pre- 
caution was  taken  to  exercise  absolute  fairness. 
No  picking  over  was  indulged  in,  as  it  is 
obvious  that  the  balance  of  gain  or  loss  might 
be  thrown  materially  to  one  side  or  the  other 


104     THE  PITFALLS   OF  SPECULATION 

by  such  a  process.  In  order  to  prove  the  total 
result  as  compared  with  the  whole,  the  loss  on 
the  entire  number  of  shares  handled  in  the  500 
accounts  was  compared  with  the  loss  on  the 
total  number  of  shares  in  the  entire  four  thous- 
and accounts,  (operations  in  grain  and  other 
commodities  not  being  considered),  and  the  re- 
sult was  found  to  be  harmonious. 

No  preconceived  ideas  nor  prejudices  were 
permitted  to  enter  the  investigation,  the  object 
sought  being  to  establish  figures  which  might 
be  considered  fairly  indicative  of  what  usually 
occurred  in  public  speculative  affairs  under 
normal  conditions. 

It  will  be  understood  that  the  facts  and 
figures  hereafter  presented  were  based  wholly 
upon  total  results,  the  entire  number  of  ac- 
counts being  finally  viewed  in  a  composite 
light.  On  this  theory  the  following  results 
were  discovered: 

Three  hundred  and  forty-three  accounts  re- 
sulted in  a  net  loss  at  their  termination ;  88  ac- 
counts resulted  in  a  net  profit;  52  accounts 
were  even  or  showed  inconsiderable  differ- 
ences. The  result  of  17  accounts  is  unknown, 
as  the  Steel  stocks  represented  were  taken  up 
by  the  purchasers,  in  all  cases  a*  a  considerable 
paper  loss. 


WHAT  SPECULATIVE  ACCOUNTS  SHOW  105 

The  total  deficit  on  all  losing  ac- 
counts   was $1,245,000 

The  total  gain  on  all  profitable  ac- 
counts         288,000 

Leaving  a  net  deficit  of $957,000 

The  total  number  of  shares  handled  was 
1,112,000,  of  which  820,000  shares  were  origin- 
ally purchases,  and  292,000  originally  short 
sales. 

The  total  brokerage  charges,  commissions, 
interest,  etc.,  were  $275,000,  which  amount  is 
included  in  the  total  loss. 

The  comparative  losses  on  short  sales,  share 
for  share,  were  about  20%  greater  than  the 
losses  on  purchases. 

The  favorite  method  of  operation  was  to 
purchase  or  sell  on  slight  reactions  from  high 
or  low  prices. 

The  average  price  of  all  purchases  for  long 
account  was  ^2^^,  and  the  average  price  of  all 
short  sales  was  3554- 

The  scale  order  was  employed  in  53  ac- 
counts, (42  long  and  11  short),  but  was  either 
abandoned  or  interfered  with  in  all  but  eight 
instances. 

There  were  numerous  evidences  of  systems 
being  used ;  this  is  not  susceptible  of  proof,  but 


io6     THE  PITFALLS  OF  SPECULATION 

the  uniform  character  of  the  trading  as  shown 
by  constant  repetitions  was  considered  good 
evidence  of  a  fixed  method.  Over  90%  of  the 
accounts  of  this  description  resulted  in  loss. 

In  23  instances  an  inverted  scale  order  was 
employed,  purchases  being  made  at  fixed  in- 
tervals as  the  stock  advanced.  This  is  the 
principle  called  "going  with  the  market."  It 
failed  in  every  instance. 

In  considering  the  above  figures,  the  first  and 
most  vital  point  is  the  predominance  of  loss 
over  profit  under  conditions  as  nearly  equal  as 
possible  to  present.  The  reason  for  consider- 
ing the  matter  in  the  light  of  a  gambling  tran- 
saction was  to  develop  the  fact  that  the  total 
loss  was  distinctly  greater  than  the  percentage 
against  the  trader  as  represented  by  commis- 
sions, the  loss  being  $957,000,  and  the  commis- 
sion charges  only  $275,000. 

As  the  price  of  the  stock  at  the  beginning 
and  end  of  the  period  considered  was  the  same, 
and  as  nothing  of  an  abnormal  character  oc- 
curred, this  additional  loss  must  be  attributed 
to  other  causes,  and  here  the  mechanical  draw- 
back ends  and  the  personal  equation  enters. 

Everything  being  equal,  the  surplus  loss  of 
$682,000  must  be  attributed  to  erroneous  men- 
tal operations,  and  when  the  further  fact  is 


WHAT  SPECULATIVE  ACCOUNTS  SHOW  107 

considered  that  the  average  price  paid  for 
stocks  was  42S/8>  and  the  average  price  at  which 
stocks  were  sold  was  35^,  the  theory  that  the 
pubhc  reverses  the  methods  dictated  by  reason 
is  confirmed.  It  is  apparent  that  if  this  proclivity 
had  not  been  indulged  in  the  result  would  have 
been  a  net  profit ;  that  is  to  say,  if  37  had  been 
taken  as  a  pivotal  point,  and  purchases  made 
below,  or  sales  above  it,  numerous  gains  could 
have  been  made  on  either  side,  especially  on 
purchases,  as  the  short  seller  would  have  had 
about  6  points  in  dividends  against  him  during 
the  period,  which  has  not  been  considered  in 
the  figures  given,  but  which  is  reflected  with 
considerable  accuracy  in  the  composite  result. 

An  examination  of  financial  columns  and 
current  gossip  at  corresponding  periods  of  high 
and  low  prices  showed  no  well  founded  reasons 
for  the  consensus  of  opinion  at  such  times. 

The  gossip  rather  reflected  than  incited  the 
prevailing  cheerful  or  pessimistic  feeling,  and 
no  particular  mischief  can  be  attributed  to  this 
source. 

Next  in  importance  to  the  suicidal  tendency 
to  sell  cheap  and  buy  dear  was  the  widespread 
evidence  of  greed.  In  almost  every  case  where 
an  account  was  successfully  begun,  the  oper- 
ations were  immediately  extended  in  volume 


io8     THE  PITFALLS  OF  SPECULATION 

until,  even  after  a  large  number  of  successful 
results,  a  single  reverse  wiped  out  the  entire 
credit.  Even  those  operators  who  showed  ap- 
parent good  judgment  in  buying  and  selling 
were  subject  to  this  fault  to  so  marked  a  de- 
gree that  after  being  right  nine  times  and 
wrong  once,  they  were  on  the  debit  side  of  the 
ledger. 

The  inability  of  the  average  trader  to  map 
out  a  plan  and  follow  it  was  also  distinctly 
exemplified.  Methods  and  systems  begun  and 
pursued  for  a  time  with  mathematical  pre- 
cision almost  invariably  ended  in  a  mass  of 
indiscriminate  operations  caused  apparently  by 
fright  or  confusion  in  case  of  loss,  and  ej^hila- 
ration  and  enthusiasm  if  successful. 

Another  interesting  development  was  that 
the  accounts  of  those  speculators  who  operated 
from  a  distance,  or  from  points  where  no  brok- 
erage office  was  located,  made  a  better  showing 
than  those  of  local  traders.  The  losses  were 
smaller  and  the  gains  larger.  The  contrast 
was  so  marked  that  it  would  appear  that  iso- 
lation has  its  advantages.  The  marginal  pro- 
vision made  by  these  distant  traders  was  more 
ample,  and  the  operations  were  fewer  in  num- 
ber. These  two  points  alone  were  a  decided 
advantage.    They  also  escaped  the  ill-advised 


WHAT  SPECULATIVE  ACCOUNTS  SHOW  109 

action  frequently  induced  by  flurries  and 
canards,  and  altogether  seemed  to  operate 
more  intelligently,  possibly  because  the  oppor- 
tunities to  make  fools  of  themselves  were  re- 
stricted. 

In  considering  the  above  figures  and  deduc- 
tions, it  must  be  constantly  borne  in  mind  that 
the  market  covered  a  comparatively  narrow 
range  for  an  active  stock;  that  no  unusual  op- 
portunities for  profit  or  loss  existed,  and  that 
the  end  of  the  period  showed  the  stock  un- 
changed in  price. 

In  comparing  it  with  a  great  cycle  of  specu- 
lative prices  the  results  would  be  greatly  mag- 
nified. The  object  in  view  was  to  submit  re- 
sults entirely  of  a  normal  nature. 

It  is  doubtful  whether  operations  in  U.  S. 
Steel  stock  were  particularly  desirable  at  any 
time  during  the  period  mentioned,  as  it  pre- 
sented no  great  immediate  promise,  and  nu- 
merous dangers  at  all  times.  There  were  many 
surface  indications  of  a  warning  character. 
The  stock  was  untried ;  the  earnings  were  com- 
paratively so  large  as  to  suggest  inflation,  and 
the  fact  of  it  being  a  public  favorite  was  proof 
of  a  bad  technical  condition. 

The  student  of  the  technical  position  of 
shares  would  have  reasoned  that  the  enormous 


no     THE  PITFALLS   OF   SPECULATION 

floating  supply  of  the  stock  in  public  specu- 
lative hands  would  make  any  marked  or  sus- 
tained advance  impossible,  as  any  considerable 
appreciation  in  the  market  price  would  meet 
with  enough  selling  to  stop  the  upward  trend, 
while  the  danger  of  panic  or  severe  decline 
would  be  increased  for  exactly  the  same  rea- 
sons. 

It  is  therefore  probable  that  the  better  class  of 
traders  shunned  the  stock  entirely,  especially 
when  the  fact  is  considered  that  numerous 
other  active  stocks  presented  better  opportuni- 
ties during  the  period  considered. 

For  instance,  Louisville  &  Nashville  made 
and  maintained  an  advance  of  $25  per  share 
from  July,  1901,  to  March,  1903,  the  advance 
being  justified  by  improved  conditions  in  the 
South. 

Nevertheless  U.  S.  Steel  was  the  public 
favorite,  and  was  obviously  the  best  example 
of  public  speculation. 

Viewed  in  the  light  of  comparative  results, 
the  loss  of  $682,000  on  total  transactions  of 
1,112,000  shares  may  at  first  blush  be  con- 
sidered small,  only  a  little  over  fifty  cents  per 
share,  but  it  must  be  remembered  that  this  was 
a  total  deficit  on  all  operations,  and  that  the 
numerous  profits  made  at  various  times  were 


WHAT  SPECULATIVE  ACCOUNTS  SHOW  iii 

used  as  an  offset  to  losses.  The  question  is, 
why  should  any  loss  have  occurred  when  there 
was  no  decline  in  market  valuation? 

If  the  barometrical  character  of  the  exami- 
nation outlined  above  is  admitted,  the  fact  is 
established  that  a  loss  was  sustained  which  can 
be  attributed  to  nothing  but  mistaken  methods 
and  impulses.  In  other  words,  the  actual  per- 
centage against  the  trader  was  more  than 
trebled  by  personal  actions,  a  thing  which 
would  not  have  been  possible  with  any  me- 
chanical gambling  device. 

The  matter  presented  in  this  chapter  offers 
much  food  for  thought.  It  is  not  in  line  with 
the  alluring  view  of  speculative  opportunities 
frequently  presented  to  the  public  eye.  The 
statements  already  made  that  speculation 
could  be  made  profitable,  are  in  no  way  modi- 
fied, but  the  disease  must  be  diagnosed  before 
it  can  be  treated,  and  some  of  the  medicine 
necessary  to  financial  health  has  a  bitter  taste. 

Written  large  between  the  lines  of  every 
disastrous  speculative  account  are  the  reasons 
for  failure.  True,  this  is  cold  comfort,  for 
the  losses  represented  cannot  be  recovered  by 
analysis,  but  the  lesson  may  be  of  great  value 
in  its  bearing  on  future  ventures. 

Discovering   and   charting   submerged    and 


113     THE  PITFALLS  OF  SPECULATION 

dangerous  rocks  by  a  process  of  shipwrecking 
is  an  unpleasant  method  of  acquiring  knowl- 
edge, but  a  most  forcible^  one. 


Grain  Speculation 

AS  a  confirmation  of  the  preconceived 
theory  that  the  percentage  of  loss  in 
grain  speculation  was  much  greater 
than  in  stocks,  an  examination  of  accounts  was 
undertaken  based  on  the  same  general  lines 
outlined  in  stocks. 

The  commodity  chosen  for  investigation 
was  No.  2  Wheat,  and  the  transactions  con- 
sidered were  made  on  prices  established  on  the 
Chicago  Board  of  Trade. 

The  period  covered  was  from  January,  1901, 
at  which  time  the  price  was  76^,  to  Decem- 
ber, 1903,  when  the  price  was  7734- 

During  this  period  of  three  years  the  lowest 
price  touched  was  63%  in  July,  1901,  and  the 
highest  price,  95  in  September,  1902. 

The  range  for  each  of  the  three  years  was : 

63/^  to  795^  in  1901. 

6jj4  to  95  in  1902. 

70^  to  93  in  1903. 

These  figures  are  presented  as  evidence  of 

113 


114     THE  PITFALLS   OF  SPECULATION 

numerous  wide  speculative  movements  occur- 
ring between  the  same  comparative  basic 
prices  at  the  begirming  and  ending  of  the  three 
years. 

Five  hundred  accounts  were  found  available 
for  dissection,  and  the  same  appearance  of 
unanimity  of  operations  as  that  apparent  in 
stocks  was  shown. 

The  principal  seeming  difference  between 
stock  and  grain  trading  was  that  the  public 
indulged  more  freely  in  operations  for  the 
short  account  in  grain  than  in  stocks.  Several 
instances  were  discovered  where  for  a  time  the 
preponderance  of  operations  were  for  short  ac- 
count, invariably  at  low  prices  and  on  the  eve 
of  an  advance. 

All  the  errors  illustrated  in  stocks  were 
found  to  exist  in  grain  on  a  magnified  scale. 
The  tendency  to  buy  at  the  top,  and  sell  at  the 
bottom,  was  particularly  marked,  and  while  the 
average  buying  price  of  79%  may  look  low,  it 
may  be  said  in  explanation  that  the  prices  of 
95c.  in  1902,  and  93c.  in  1903,  were  of  a  manip- 
ulated nature,  and  of  very  brief  duration,  and 
that  comparatively  few  transactions  were  pos- 
sible at  very  high  prices.  If  these  two  abnor- 
mal periods  are  eliminated,  the  average  price 
was  high. 


GRAIN  SPECULATION  115 

The  investigation  resulted  as  follows: 

412  accounts  showed  a  final  loss. 
74  accounts  showed  a  final  profit. 
14  accounts  were  neutral. 

The  total  deficit  on  all  losing  accounts  was 
$923,000.  The  total  gain  on  all  profitable  ac- 
counts, $52,000,  leaving  a  net  deficit  of  $871,- 
000. 

The  total  amount  of  grain  handled  was  90,- 
000,000  bushels  (the  speculative  equivalent  of 
900,000  shares  of  stock),  of  which  62,000,000 
bushels  were  originally  purchases,  and  28,000,- 
000  originally  short  sales. 

The  total  brokerage  charges  were  $112,500. 

The  comparative  losses  on  short  sales  were 
16%  less  than  on  purchases. 

The  scale  order  was  employed  in  140  ac- 
counts, (92  long  and  48  short),  but  was  pur- 
sued to  an  uninterrupted  conclusion  in  only 
21  instances. 

The  average  buying  price  was  79^^,  and  the 
average  selling  price  70^. 

The  principal  facts  illustrated  as  compared 
with  stock  operations  are  a  net  loss  of  $757,000 
over  and  above  an  actual  mechanical  percent- 
age of  only  $112,500,  and  the  small  total  of 
gross  profits  as  compared  with  the  total  of 
gross  losses. 


ii6     THE  PITFALLS   OF   SPECULATION 

It  has  been  stated  that  the  grain  investiga- 
tion was  begun  with  the  preconceived  opinion 
that  losses  in  grain  would  be  proportionately 
larger  than  those  in  stocks,  and  the  result,  as 
far  as  it  goes,  is  confirmatory.  It  is  only  fair 
to  state  in  this  respect  that  losses  shown  in 
corn  were  comparatively  larger  than  in  stocks, 
but  much  smaller  than  in  wheat.  This  is  prob- 
ably explained  by  the  fact  that  corn  has  under- 
gone a  readjustment  of  valuation  through  its 
increased  uses,  and  enormous  increase  of  ex- 
portation, both  of  the  cereal  itself  and  its  by- 
products, and  also  the  fact  that  we  raise  80% 
of  the  world's  corn,  and  that  available  acreage 
is  about  exhausted. 

These  facts  were  so  patent  as  to  be  of  as- 
sistance to  even  the  obtuse  mind  of  the  ordi- 
nary speculator,  and  as  purchases  predomin- 
ated, and  the  price  has  gradually  advanced, 
comparative  losses  were  smaller. 

The  preconceived  opinion  as  to  losses  in 
grain  operations  was  based  upon  the  irrefut- 
able fact  that  study  and  judgment  must  in 
such  operations  be  largely  superseded  by 
purely  gambling  principles.  In  other  words, 
the  probable  price  of  grain  cannot  be  intelli- 
gently forecasted  by  the  ordinary  speculator, 
as  no  reliable  figures  are  obtainable,  and  no 


GRAIN  SPECULATION  117 

prophecies  as  to  future  conditions  can  be  re- 
liably adduced.  The  annual  crop  scares  are 
not  dependable,  and  actual  conditions  which 
bear  upon  future  prices  are  available  only  to 
the  chosen  few  who  can  afford  to  make  their 
own  expensive  investigations! 

It  is  needless  to  say  that  possessors  of  val- 
uable knowledge  do  not  diffuse  their  informa- 
tion, nor  expose  their  operations  to  public  view 
until  the  psychological  moment  arrives  at 
which  they  wish  to  sell. 

It  is  possible  to  obtain  figures  as  to  the  earn- 
ings of  corporations,  and  such  figures  being  at 
hand,  the  rest  is  a  matter  of  judgment  and 
study,  but  no  figures  which  may  be  considered 
a  safe  basis  of  operations  are  obtainable  anent 
cereals. 

In  addition  to  the  gambling  elements  which 
this  lack  of  knowledge  injects  into  operations 
in  cereals,  they  are  much  more  subject  to  man- 
ipulation. The  record  of  a  single  individual 
"dumping"  the  entire  speculative  public  in 
wheat,  is  not  rare  in  the  history  of  grain  specu- 
lation, and  the  capital  employed  in  the  opera- 
tion would  not  make  a  hearty  meal  for  Wall 
Street. 

There  is  another  drawback  to  grain  specu- 
lation as  compared  with  stocks,  and  while  it  is 


ii8    THE  PITFALLS  OF  SPECULATION 

apparently  overlooked  or  ignored  by  the  aver- 
age trader,  it  is  important,  and  is  as  follows: 

The  possessor  of  loo  shares  of  stock  bought 
at  a  normal  price,  is  the  recipient  of  dividends, 
or  may  naturally  expect  ultimate  improvement 
in  his  security  if  it  is  a  good  one. 

The  possessor  of  10,000  bushels  of  grain  at  a 
normal  price  is  subject  to  storage  charges  and 
insurance,  and  has  equal  chances  of  profit  or 
loss  in  future  prices. 

To  illustrate  this:  The  man  who  invests  $10,- 
000  in  a  6%  stock,  at  par,  receives  $600  per 
year  on  his  investment,  while  he  who  invests 
the  same  amount  in  10,000  bushels  of  wheat 
at  $1.00  per  bushel,  pays  about  $1,200  a  year 
to  carry  his  property.  This  is  looking  at  the 
matter  as  a  cash  proposition,  but  the  com- 
parative drawback  cannot  be  escaped  by  any 
form  of  operations  for  the  long  account, 
whether  the  transaction  be  for  one  day  or  one 
year. 

The  optional  nature  of  grain  presents  an- 
other drawback  in  that  an  unfortunate  opera- 
tion cannot  be  continued  indefinitely,  except 
by  the  process  of  transferring  to  more  deferred 
options  with  a  multiplication  of  commission 
charges.  Even  by  this  process  the  transferred 
trade  may  be  regarded  in  the  light  of  a  new 


GRAIN  SPECULATION  iig 

transaction,  as  the  buyer's  original  reasons  for 
believing  that  the  present,  or  coming  crop, 
would  be  salable  at  a  certain  price  before  the 
maturity  of  the  option  purchased,  have  been 
entirely  obliterated  by  the  lapse  of  time,  and 
he  now  finds  himself  depending  upon  the 
chances  of  recovering  in  the  new  transaction 
the  losses  sustained  in  the  old. 

If  he  accepts  and  pays  for  the  commodity, 
and  a  year  later  finds  that  the  price  has  ad- 
vanced 12  cents,  his  position  is  in  no  way  im- 
proved, as  the  expense  of  carrying  his  product 
for  that  period  has  offset  the  higher  market 
value. 

The  trader  who  purchases  wheat  has  against 
him,  therefore,  all  the  ordinary  drawbacks  of 
misleading  appearances,  manipulation,  etc.,  but 
in  addition,  the  element  of  purely  gambling 
chance  is  greatly  increased,  and  a  tremendous 
submerged  percentage  added. 

The  foregoing  statements  at  once  suggest 
the  question,  "If  successful  operations  for  the 
long  account  are  so  difficult,  why  should  not 
operations  on  the  other  side  present  advantages 
in  direct  inverse  ratio  ?^* 

The  point  is  well  taken,  and  the  answer  is 
simply,  "they  do  present  such  opportunities." 
This  advantage  is  illustrated  to  some  extent 


I20     THE  PITFALLS  OF  SPECULATION 

by  the  fact  that  operations  for  the  short  ac- 
count, in  grain,  showed  a  larger  ratio  of  profit, 
or  rather,  a  smaller  ratio  of  loss,  than  was 
found  in  purchases. 

But  in  public  short  selling  we  find  that  a  too 
general  recognition  of  its  advantages  would 
lead  to  the  undoing  of  the  trader  by  creating 
a  technical  position  which  would  be  very  in- 
viting to  the  moneyed  manipulators.  This 
danger  must  be  considered,  as  well  as  the  fact 
that  the  theory  of  accidents  being  in  favor  of 
the  short  seller  of  stocks,  is  exactly  reversed 
in  grain.  For  instance,  war,  classed  as  the 
greatest  of  all  calamities  under  certain  con- 
ditions, is  an  invariable  reason  for  higher  prices 
in  food  products.  The  tendency  to  sell  at  low 
prices  also  prevails  and  must  be  overcome  if 
operations  for  the  short  account  are  to  prove 
profitable;  but  brushing  aside  all  these  ele- 
ments of  accident  or  error,  it  may  be  stated 
that  the  short  seller  of  cereals  possesses  a  dis- 
tinct advantage. 

The  fact  will  no  doubt  be  pointed  out  that 
short  operations  have  proved  uniformly  dis- 
astrous in  the  past  few  years.  While  this  is 
granted,  it  in  no  way  interferes  with  the  argu- 
ments but  rather  supports  them  in  its  demon- 
stration of  the  possibilities  of  manipulation  by 


GRAIN  SPECULATION  i3i 

one  or  two  individuals.  But  there  is  another 
reason  for  this  reversal  of  form  which  was 
apparently  recognized  by  a  few  men  and  stub- 
bornly overlooked  by  the  majority.  The  fact 
is  that  all  staples  have  recently  undergone  a 
process  of  revaluation  to  a  higher  basis  and 
that  the  seller  of  every  product  has  worked 
against  the  current  of  this  universal  readjust- 
ment. 

That  the  public  is  slow  to  recognize  changed 
conditions  is  demonstrated  by  the  fact  that 
the  period  of  high  prices  from  the  latter  part 
of  1888  to  early  in  1892  finally  educated  them 
to  consider  one  dollar  the  normal  price  of 
wheat  at  just  the  time  when  a  readjustment  to 
lower  valuation  took  place  and  enormous 
losses  were  sustained  by  a  tenacious  adherence 
to  this  theory  of  dollar  wheat  until  the  expen- 
sive lesson  had  been  ground  into  them  that  a 
change  had  occurred.  The  more  recent  re- 
adjustment to  high  prices  was  likewise  un- 
recognized and  vigorously  combatted. 

This  is  a  very  marked  evidence  of  the  fact 
that  speculators  generally  move  more  on  a 
mental  chart  of  recent  market  action  than  upon 
any  broad  lines  of  thought. 

It  would  be  really  amusing  to  review  the 
opportunities  set  forth  by  the  advocates  of  the 


122     THE  PITFALLS  OF  SPECULATION 

so-called  chart  system  as  applied  to  grain 
trading  for  the  last  fifteen  years.  We  find 
them  in  the  position  of  purchasing  wheat 
through  a  period  of  depression  and  later  sell- 
ing it  persistently  through  a  period  of  advanc- 
ing prices,  for  it  must  be  admitted  that 
changed  conditions  cannot  be  contemplated  in 
a  fixed  system  founded  on  past,  not  future 
events.  The  votaries  of  the  charts  will  no 
doubt  attempt  to  evade  this  statement  by 
demonstrations  covering  an  insufficient  period 
or  by  claiming  that  changed  conditions  were 
recognized  and  their  little  machines  readjusted 
to  meet  them.  The  first  refutation  is  simply 
unfair,  and  if  the  second  is  true,  correct  recog- 
nition v/ould  have  been  sufficient  without  any 
auxiliary  machinery. 

The  difficulty  of  successful  operations  in 
cereals  by  ordinary  traders  is  very  pertinently 
shown  by  the  remarks  made  by  the  most  suc- 
cessful bucket  shop  man  in  the  United  States. 

"I  can  better  afford  to  trade  flat  in  grain 
than  to  trade  in  stocks  at  one  quarter  commis- 
sion ;  they  have  nothing  to  go  on.'" 

This  is  the  statement  of  a  man  v/ho  looked 
upon  the  matter  in  a  purely  gambling  light  and 
admitted  that  he  could  eliminate  the  actual 


GRAIN  SPECULATION  123 

percentage  in  grain  transactions  and  depend 
wholly  upon  the  speculator  beating  himself. 

Even  the  greater  lights  of  speculation,  forti- 
fied by  large  capital,  have  found  the  hazards 
of  grain  speculation  so  great,  and  the  most 
careful  forecasts  so  unreliable,  that  in  many 
instances,  and  after  disastrous  experiments, 
they  have  transferred  their  operations  wholly 
to  stocks.  Mr.  James  R.  Keene  twice  retired 
from  the  Chicago  arena  a  badly  whipped  man, 
and  it  is  related  of  him  that  he  refused  an  in- 
timate friend  financial  assistance  in  a  grain 
deal  with  the  terse  remark  that  he  would  be 
doing  him  no  kindness,  as  it  was  impossible  to 
win. 

This  is,  of  course,  an  extreme  view,  for 
money  lost  by  one  man  must  necessarily  be 
gained  by  another;  but  this  fact  does  not  in- 
terfere with  the  broad  general  principle  that 
stocks  of  good  corporations  are  productive, 
and  that  the  possession  of  staples  is  an  ex- 
pense. One  is  for  perpetual  existence  and 
natural  enhancement,  the  other  for  consump- 
tion. 

The  contention  of  Mr.  Keene  that  it  is  im- 
possible to  make  money  in  cereal  speculation 
cannot  be  wholly  concurred  with.  The  man 
who  is  astute  enough  to  foresee  a  final  read- 


124     THE  PITFALLS   OF   SPECULATION 

justment  of  values  or  who  purchases  staples 
at  an  extremely  low  price  in  periods  of  de- 
pression, and  vice  versa,  will  succeed;  but  the 
average  grain  trader  will  find  his  opportunities 
and  possibilities  reduced,  and  his  obstacles 
multiplied  by  comparison  with  operations  in 
stocks. 


XII 

Suggestions  as  to  Intelligent  Methods 

IN  deciding  what  to  buy  and  when  to  buy  it, 
the  speculator  faces  the  most  formidable  of 
his  problems,  for  upon  his  decision  upon  these 
two  points  rests  success  or  failure. 

It  will  be  necessary  for  him  to  concentrate 
upon  this  task  research,  labor  and  clear  think- 
ing, coupled  with  technical  knowledge  and 
sustained  by  precedent. 

In  approaching  the  first  phase  of  the  ques- 
tion— What  to  buy — it  may  be  well  to  employ 
the  time-honored  method  of  elimination,  and 
to  consider  primarily  what  not  to  buy. 

It  seems  incredible  that  the  numerous  oil, 
mining,  and  other  companies  which  advertise 
large  returns  on  low  priced  stocks,  or  immense 
values  for  small  investments,  should  find  a 
market,  but  the  fact  remains  that  the  money 
annually  invested  (?)  in  this  class  of  stocks  is 
so  considerable  an  amount  as  to  demand  some 
comment,  and  warrant  a  note  of  warning. 

This   class   of   so-called   securities   may   be 

125  ^ 


126     THE   PITFALLS   OF   SPECULATION 

said,  by  and  large,  to  have  no  value  at  all. 
Securities  which  have  an  actual  dividend  earn- 
ing power  of  any  probable  duration  do  not  go 
begging  long  in  this  day  and  age,  and  are 
seldom  advertised  for  sale  in  the  newspapers. 

Let  this  fact  be  remembered:  a  mine,  an  oil 
well,  or  any  other  producing  company  with  a 
demonstrable  value  can  command  a  market 
price  at  all  times.  That  is  to  say,  if  the  owner, 
or  owners  of  a  mine  can  show  a  certain  amount 
of  ore  in  sight,  or  can  prove  that  such  ore 
exists,  they  can  command  a  fair  price  for  that 
ore  as  surely  as  if  the  commodity  were  flour  in 
a  storehouse  instead  of  gold,  silver,  or  copper 
in  a  mine.  Any  man  who  has  a  knowledge  of 
mining  affairs,  (and  who  has  no  mining  stock 
for  sale) ,  will  confirm  this  statement. 

If,  therefore,  the  sellers  of  stock  in  such  com- 
panies have  a  property,  capable  of  producing  a 
certain  commodity  which  may  be  sold  at  a 
profit,  they  must,  in  order  to  reap  any  substan- 
tial benefit  from  the  "stocking"  operation,  sell 
as  much  of  the  stock  at  high  prices  as  to  cover 
the  great  expense  of  time,  a  costly  advertising 
campaign,  officers'  salaries,  a  large  commission 
to  fiscal  agents,  (usually  20%),  and  leave  a 
margin  of  profit  for  themselves.  They  must, 
in  short,  sell  to  the  public  at  about  double  the 


SUGGESTIONS  AS  TO  METHODS       127 

value  placed  on  the  property  by  men  of  wis- 
dom and  experience. 

There  are  no  doubt  cases  where  the  pro- 
moters of  such  securities  believe  that  the  value 
of  their  own  property  is  greater  than  any  ap- 
praised market,  in  which  case  we  find  their 
judgment  opposed  to  that  of  shrewd  men  seek- 
ing to  invest  capital.  In  such  opposition  of 
judgment  the  owners  may  be  right — the 
chances  are  a  hundred  to  one  that  they  are 
wrong. 

But  even  the  above  examples  are  too  broad, 
for  the  great  majority  of  these  concerns  have 
no  property  of  any  demonstrable  value  what- 
ever. Their  stocks  are  made,  like  Hodge's 
razors,  to  sell.  The  promoters  depend  upon 
golden  promises,  statements  misleading,  or 
actually  false,  and  public  gullibility  to  create  a 
market  for  their  stocks.  That  they  are  able 
to  sell  them  at  all  is  remarkable. 

These  companies  use  every  means  for  de- 
ceiving the  public.  They  employ  the  best  of 
writers  to  get  up  glowing  prospectuses,  and  not 
infrequently  the  names  of  prominent  men  are 
found  among  their  officials  or  directors.  These 
latter  individuals  participate  sometimes  through 
ignorance  and  enthusiasm,  sometimes  through 
actual  dishonesty.     In  either  case  it  may  be 


128     THE  PITFALLS   OF  SPECULATION 

justly  stated  that  a  prominent  name  added  to 
the  roster  of  an  advertising  company  is  not 
sufficient  proof  of  the  property's  merit. 

In  addition  to  these  facts  there  is  no  recog- 
nized market  for  this  class  of  stocks,  and  they 
cannot  be  disposed  of  like  listed  securities,  at  a 
moment's  notice.  This  is  in  itself  a  great  draw- 
back. 

In  making  these  statements  there  is  no  pre- 
judice nor  desire  to  be  unfair.  There  are  no 
doubt  exceptions  to  the  rule,  but  these  excep- 
tions are  so  rare  that  the  best  plan  possible  is 
to  eschew  all  such  properties  entirely,  no  matter 
how  alluring  the  promises,  or  how  apparently 
well  founded  the  venture.  There  are  plenty  of 
good  listed  securities,  the  prices  of  which 
periodically  reach  high  and  low  points,  the 
value  of  which  is  founded  upon  recognized 
business  principles  and  necessities. 

The  listed  securities  of  Wall  Street  are  di- 
vided into  two  distinct  classes:  Industrial  and 
Railroad ;  and  viewed  from  a  speculative  stand- 
point the  former  class  is  the  most  hazardous,  in 
that  they  are  generally  more  subject  to  manipu- 
lation, competition,  or  harmful  legislation. 
Those  who  possess  a  sufficiently  tenacious 
speculative  memory  will  recall  the  affairs  of  the 
Whiskey  trust  and  the  Cordage  trust  and  their 


SUGGESTIONS  AS  TO  METHODS       129 

sad  demise ;  and  while  great  declines,  and  even 
assessments,  have  occurred  in  railroad  stocks, 
they  have  always  eventually  proved  their  real 
value.  Good  Industrials  may  occasionally  be 
purchased  safely  and  profitably,  but  the  rails 
present  the  same  opportunities,  and  are  safer 
and  more  open  to  comprehensive  investigation 
and  correct  judgment. 

At  the  rails,  therefore,  we  stop.  It  may  be 
argued  that  the  process  detailed  above  is  a  mat- 
ter of  degree,  ana  that  it  might  be  continued 
until  only  government,  or  other  gilt  edged 
bonds,  remained;  but  the  question  here  dis- 
cussed is  speculation,  and  it  is  taken  for  granted 
that  what  is  sought  is  the  golden  mean  between 
certain  loss  and  certain  cent  per  cent. ;  i.  e.  prop- 
erties which  combine  a  fair  amount  of  stability 
and  future  promise  with  periodical  opportuni- 
ties for  advantageous  purchases  and  sales. 

Viewing  the  future  of  railroad  securities  in 
a  broad  general  light,  their  gradually  increasing 
value  appears  certain.  The  continued  increase 
of  population  produces  for  them  present  returns 
from  travel  and  shipping,  and  the  demands  of 
the  settled  districts  ensure  more  permanent  re- 
turns. So  far  as  probable  competition  is  con- 
cerned, it  grows  daily  less  with  the  concentra- 
tion of  capital.    It  is  likely  that  even  today  the 


130     THE  PITFALLS  OF  SPECULATION 

projectors  of  a  railroad  which  would  come  into 
harmful  competition  with  present  lijies  would 
find  it  impossible  to  raise  the  money  for  the 
furtherance  of  their  plan. 

A  brief  perusal  of  statistics  will  show  that 
the  oldest  and  best  railroad  securities,  repre- 
senting the  properties  traversing  a  densely 
populated  territory,  are  subject  to  the  smallest 
comparative  range  f  fluctuation.  These  stocks 
are  gradually  undergoing  a  process  of  absorp- 
tion which  will  in  time  reach  to  the  newer 
roads  of  less  developed  country. 

The  West,  with  its  enormous  undeveloped 
territory  and  resources,  presents  great  promise 
to  the  prophetic  mind.  The  problem  of  ex- 
tensive irrigation  is  yet  to  be  solved,  but  aside 
from  agricultural  pursuits,  the  West  possesses 
a  wealth  of  mineral  and  lumbering  industries, 
and  possibilities  which  independently  guar- 
antee its  future. 

"The  Atchison  Railroad  is  a  streak  of  rust 
running  through  a  desert,"  said  the  elder 
Woerishoffer  thirty  years  ago,  as  he  industri- 
ously sold  the  stock  short  at  prices  which  would 
seem  ridiculously  low  today.  Possibly  Atchi- 
son bore  that  aspect  at  that  time,  but  today  it 
is  a  modern,  well  equipped,  dividend  paying 
property,  traversing  a  rich  and  constantly  im- 


SUGGESTIONS  AS  TO  METHODS       131 

proving  territory.  The  improvement  of  that 
brief  period  is  significant. 

The  South  also  presents  promise  of  great 
future  improvement.  The  readjustment  of 
cotton  prices  to  a  higher  general  level,  and  the 
development  of  important  mineral  resources 
are  combining  to  dispel  the  long  lethargy  of 
this  section,  and  the  growing  competitive  im- 
portance of  its  gulf  ports  is  too  glaring  to  be 
misunderstood. 

The  believer  in  the  ^continued  growth  and 
prosperity  of  the  United  States,  the  progress 
of  the  largely  undeveloped  West,  and  the 
awakening  South  may  safely  assume  a  gradual 
and  rapid  growth  in  the  value  of  railroad 
securities  of  these  sections.  The  consensus  of 
intelligent  opinion  points  to  their  long-con- 
tinued improvement  and  advance. 

The  contention  is  therefore  made  and  offered 
for  consideration  that  the  railroad  properties 
of  the  West  and  South  offer  the  best  specu- 
lative opportunities,  combined  with  the  great- 
est degree  of  safety. 

The  foregoing  will,  possibly,  appeal  to  the 
reader  as  looking  rather  to  the  loBg  future  o£ 
properties  than  to  immediate  speculative  op- 
portunities, but  the  fairness  of  the  following 
statement  must  be  admitted: 


132     THE  PITFALLS  OF  SPECULATION 

The  hazards  of  speculation  are  so  great  that 
it  is  expedient  to  primarily  consider  a  solid 
groundwork  for  ventures.  The  trader  who 
deals  in  stocks,  the  future  of  which  he  con- 
siders secure,  can  operate  more  actively  and 
courageously  than  under  other  circumstances. 
It  does  not  follow  that  because  he  has  faith  in 
the  long  future  of  his  chosen  properties,  he 
shall  at  once  jump  in  and  buy  and  await  the 
accretion  of  time.  The  proposed  plan  of  oper- 
ation— to  await  low  prices — is  in  no  way 
changed  by  the  cheerful  view  of  the  future. 

Having  formed  a  definite  idea  as  to  the  gen- 
eral outlook  of  a  certain  group  of  properties, 
the  investigator  has  narrowed  his  research  to 
individual  stocks.  In  this  he  will  be  guided 
by  three  periods — the  past,  present,  and  prob- 
able future. 

In  examining  the  history  of  a  stock  it 
will  be  found  that  in  almost  all  cases  the  se- 
curity has  undergone,  in  early  stages,  a  radical 
advance  and  decline.  This  is  largely  oc- 
casioned by  the  fact  that  the  public  always 
makes  a  favorite  of  a  new  security,  and  will 
participate  freely  in  the  affairs  of  an  untried 
corporation,  while  standard  issues  go  begging. 
This  brings  about  a  state  of  affairs  already  ex- 
plained both  technically  and  theoretically,  and 


SUGGESTIONS  AS  TO   METHODS       133 

offers  to  the  moneyed  interests  an  opportunity 
to  sell  their  holdings  to  the  public  at  high 
prices,  and  recover  them  later  at  their  own 
figures.  Thereafter,  the  stock  will  probably 
take  its  place  among  the  standards  of  the 
Street,  and  follows  the  general  swing  to  high 
and  low  extremes  with  a  gradual  trend  toward 
increased  valuation. 

Eliminating  this  abnormal  period  of  initi- 
ation, the  investigator  will  find  a  careful  study 
of  the  past  to  be  of  great  value.  In  all  cases 
it  will  be  found  that  earnings  have  gradually 
increased,  allowing,  of  course,  for  abnormal 
periods  of  depression  and  inflation.  The  fixed 
charges  and  expenses  have  also  increased,  and 
by  an  examination  of  both  these  factors,  as 
well  as  an  allowance  for  the  diversion  of  funds 
for  purposes  of  purchase  and  improvement, 
which  expenditures  if  intelligently  made  must 
add  to  the  value  of  the  property,  the  net  re- 
sult of  the  past  may  be  considered  a  reason- 
able guide  to  future  expectations. 

The  mere  payment  of  dividends  cannot  be 
accepted  as  a  safe  basis  of  value,  for  dividends 
are  often  paid  to  the  great  detriment  of  the 
property,  and  on  the  other  hand  are  frequently 
withheld  when  they  might  be  safely  paid. 
Earnings    are    the    all    important    point,    and 


134     THE  PITFALLS   OF  SPECULATION 

when  the  investigator  has  answered  to  his  sat- 
isfaction the  questions,  "What  have  they 
earned,  and  what  have  they  done  with  the 
money?"  he  may  consider  himself  well  on  the 
way  to  his  goal. 

With  this  record  of  the  past  formed,  the 
present  earnings  may  be  scrutinized.  They 
may  recently  have  undergone  a  sudden  advance 
out  of  proportion  to  normal  growth,  or  vice 
versa.  In  either  case  a  reversal  of  present  con- 
ditions may  be  confidently  expected. 

This  simple  form  of  reasoning  applied  to  the 
affairs  of  the  United  States  Steel  Company  in 
1901-1903  would  have  sounded  a  most  distinct 
note  of  warning,  the  correctness  of  which  has 
been  amply  demonstrated. 

The  probable  future  is  based  upon  a  gradual 
improvement  from  the  normal  value  of  the 
present  as  indicated  by  the  past. 

The  consideration  of  assets,  so  far  as  a  rail- 
road property  is  concerned,  must  be  founded 
principally  on  its  ability  to  earn,  and  continue 
earning  perpetually. 

Minus  its  usefulness,  the  total  assets  of  the 
greatest  railway  system  in  existence  would  be 
little  better  than  a  mass  of  old  junk;  but  if  a 
million  dollars  has  been  so  expended  as  to  bring 
a  continued  fair  return,  that  amount  may  be 


SUGGESTIONS  AS  TO  METHODS       135 

considered  an  asset.  The  investigator  there- 
fore finds  that  his  calculations  must  be  based 
almost  wholly  upon  the  ability  of  a  property  to 
increase  its  earning  power  until  territorial 
development  reaches  high  tide,  and  thence- 
forth to  maintain  such  earnings  indefinitely. 

It  will  not  be  necessary  for  the  trader,  per- 
sonally, to  compute  the  various  and  volumin- 
ous figures  which  show  the  net  earnings — that 
is  to  say,  the  amount  applicable  to  distribution 
to  the  various  bond  and  stock  holders.  A  com- 
prehensive statement  of  income  and  expendi- 
ture may  be  obtained  from  different  published 
statistical  works,  or  by  application  to  the  sec- 
retary of  the  corporation  in  question.  With 
these  figures  before  him,  the  task  of  the  stu- 
dent is  one  of  examination  rather  than  of  com- 
pilation, and  with  such  information  at  hand, 
the  matter  may  be  viewed  in  the  same  light  as 
any  other  ordinary  business  transactions.  The 
total  income,  less  the  fixed  charges,  is  the 
amount  applicable  to  dividends  and  surplus. 

The  man  who  undertakes  such  an  investi- 
gation will  be  surprised  at  the  ease  with  which 
he  may  arrive  at  interesting  results. 

The  legal  provisions  of  the  company,  the 
rights  of  holders  of  preferences,  and  of  holders 
of  common  stock,  etc.,  ar«  all  matters  which 


136     THE  PITFALLS  OF  SPECULATION 

should  be  examined,  as  they  frequently  have 
an  important  bearing  on  values. 

If  the  plan  mapped  out  has  been  intelligently 
followed,  the  investigator  should,  by  com- 
paring his  result  with  the  value  of  money,  be 
able  to  judge  of  the  normal  value  of  any  stan- 
dard security.  If  his  figures  vary  materially 
from  the  market  price,  and  no  important  error 
nor  omission  has  been  made,  the  stock  is  sell- 
ing either  below  or  above  a  fair  valuation,  and 
the  information  which  was  the  object  of  all  his 
research  has  been  gained.  Possessed  of  this 
valuable  knowledge,  the  speculator  now  turns 
his  attention  to  the  second  phase  of  the  ques- 
tion— the  time  to  buy.  It  may  be  that  the 
price  of  his  favorite  security  is  very  low,  but 
that  a  bad  technical  position  exists  which  will 
warrant  a  belief  in  lower  prices,  or  an  extended 
period  of  dullness.  This  situation  has  already 
been  sufficiently  enlarged  upon. 

Recapitulating  the  matter  offered  above  for 
consideration,  the  course  recommended  would 
appear  as  follows: 

First,  decision  as  to  the  securities  to  be  dealt 
in,  eliminating  all  wildcat  and  untried  stocks, 
and  choosing  for  operations  standard  listed 
securities. 

Second,  determining  what  stocks  offer  the 


SUGGESTIONS  AS  TO  METHODS       137 

greatest  promise  of  continued  increase  in  value, 
as  determined  by  territory  and  its  probable  de- 
velopment and  growth. 

Third,  an  examination  of  the  physical  and 
financial  condition  of  the  individual  property, 
or  properties,  chosen,  and  a  forecast  of  the 
probable  future,  based  upon  the  demonstrated 
past. 

Fourth,  the  fixing  of  a  present  normal  value 
to  be  used  as  a  pivotal  point  in  actual  oper- 
ation. 

Fifth,  a  consideration  of  the  manipulative 
and  technical  conditions  of  the  machine  specu- 
lative in  order  to  be  able  to  judge  of  the  more 
immediate  action  of  the  market.  In  other 
words,  to  locate  the  position  of  the  stocks, 
whether  in  weak  hands  or  strong. 

This  form  of  reasoning  should  not  appear 
complicated;  it  is  the  same  process  which  any 
business  man  would  pursue  in  following  a  de- 
termination to  enter  the  grocery  business,  and 
yet  it  may  be  emphatically  stated  that  not  one 
speculator  in  a  hundred  enters  his  field 
equipped  with  even  the  most  desultory  knowl- 
edge of  what  he  is  doing.  Out  of  ten  traders 
in  U.  S.  Steel  Preferred  who  were  experiment- 
ally questioned  two  years  ago,  only  half  the 
number   knew   what    the    issue   of   preferred 


138     THE  PITFALLS  OF  SPECULATION 

Stock  amounted  to;  only  two  were  aware  of 
the  important  fact  that  the  dividend  on  the  pre- 
ferred stock  was  cumulative,  and  not  one  was 
reasonably  well  posted  as  to  its  properties  and 
earnings. 

And  yet  every  one  of  these  individuals  could 
adduce  specious  reasons  why  the  stock  should 
advance  or  decline,  reasons  which  at  best  were 
incomplete,  and  at  their  worst,  silly  or  false. 
The  outcome  of  their  individual  efforts  has  not 
been  followed,  but  it  is  safe  to  surmise  that  all 
made  mistakes  which  research,  coupled  with 
intelligent  judgment,  would  have  prevented. 

In  the  plan  of  study  submitted  in  this 
chapter,  there  will,  no  doubt,  be  a  sense  of  in- 
completeness, but  the  object  has  been  rather 
to  guide  the  reader  into  a  correct  line  of  rea- 
soning and  investigating  than  to  adduce 
specific  cases  or  pile  up  statistical  proof. 

Everything  is  left  to  individual  effort  and 
judgment,  and  the  man  who  begins  the  process 
of  research  suggested  will  make  rapid  pro- 
gress. One  developed  fact  will  suggest  an- 
other point  to  be  investigated,  and  the  process 
will  become  interesting  and  profitable. 

The  man  who  studies  and  knows,  is  the  only 
man  who  makes  permanent  gains  in  specu- 
lation. 


SUGGESTIONS  AS  TO  METHODS       139 

To  those  who  refute  the  possibility  of  ob- 
taining the  necessary  information  for  the  form- 
ing of  such  opinions,  or  who  consider  the  task 
too  great  or  too  complex  for  the  ordinary 
mind,  let  the  fair  reply  be  made,  "Try  it."  It 
is  this  hazy  idea  of  mystery  where  none  exists 
which  deters  the  ordinary  speculator  from 
even  attempting  to  use  his  own  brains,  and 
v/hich  leads  him  to  base  his  operations  upon 
hearsay  or  guesswork.  Cases  will  occur  where 
concealment,  either  partial  or  total,  will  be 
found.  For  such  the  remedy  is  simple:  let 
these  properties  alone. 

If  the  first  step  toward  the  investigation  of 
the  affairs  of  Amalgamated  Copper  had  been 
taken,  it  would  have  appeared  at  once  that  the 
corporation  was  a  mere  shell,  a  holding  com- 
pany, and  furthermore,  a  blind  pool  of  the  most 
pronounced  type.  The  value  of  such  knowl- 
edge employed  in  a  negative  sense,  that  is,  in 
preventing  operations  in  such  hippodromed 
stocks,  is  a  matter  of  history.  The  enormous 
public  losses  sustained  in  Amalgamated  Cop- 
per would  have  been  impossible  in  any  busi- 
ness on  earth  except  speculation,  for  in  any 
other  business  affair  examination  would  have 
been  the  first  thought,  and  negotiations  under 


140     THE  PITFALLS   OF  SPECULATION 

parallel  conditions  would  have  been  abruptly 
dropped. 

It  is  not  meant  to  say  that  a  mere  examin- 
ation of  figures  and  periods  is  by  any  means 
sufficient,  but  it  is  believed  that  once  started 
in  the  correct  path  of  examination  and  judg- 
ment, as  opposed  to  the  prevalent  methods  of 
guesswork  and  gambling,  the  trader  will  find 
ample  opportunities  and  incentive  for  pursuing 
his  researches  to  a  logical  conclusion.  After 
this  has  been  accomplished,  success  will  be 
measured  by  his  own  capabilities  and  business 
acumen. 

The  chapter  headed,  "Analyzing  Railroad 
Securities,"  in  Mr.  John  Moody's  book,  "The 
Art  of  Wall  Street  Investing,"  will  be  of  great 
assistance  to  the  student  who  attempts  to  fol- 
low out  the  suggestions  made  above. 


XIII 

Conclusion 

THE  three  stages  necessary  to  the  develop- 
ment of  the  theories  advanced  in  this 
work  were,  first,  a  recognition  of  the 
fact  that  public  ventures  were,  considered  as 
a  unit,  generally  disastrous;  second,  an 
analysis  of  the  causes  which  were  responsible 
for  this  unsatisfactory  fact ;  and  finally,  a  con- 
firmation of  such  analysis  by  statistical  ex- 
hibits. 

Relative  to  the  latter  feature,  the  neces- 
sarily condensed  and  restricted  nature  of  the 
figures  submitted  may  be  considered  insuf- 
ficient evidence,  but  as  it  is  certain  that  there 
is  never  a  material  division  of  public  specu- 
lative opinion  at  any  time,  the  books  of  even 
one  house  with  a  public  clientele  may  be  con- 
sidered a  fair  indication  of  all  others. 

If  the  four  thousand  accounts,  with  their 
tens  of  thousands  of  operations,  could  be  pre- 
sented in  detail,  this  unanimity  of  action  would 
be  more  apparent,  and  their  barometrical  value 
greatly  magnified. 

141 


142      THE  PITFALLS  OF  SPECULATION 

The  figures  submitted,  however,  are  con- 
firmatory and  not  basic,  and  while  they  are 
important,  in  that  they  dovetail  with  precon- 
ceived opinions,  the  logical  conclusions  pre- 
sented must  stand  on  their  own  bottom. 

That  the  public  loses  money  in  speculation 
is  a  notorious  fact;  that  such  losses  take  place 
in  an  arena  which  presents  equal  opportunities 
for  profit  or  loss  is  indisputable,  and  it  must 
follow,  as  the  night  the  day,  that  the  losses 
sustained  are  the  result  of  mistaken  judgment, 
erroneous  methods,  or  misleading  appearances. 

In  presenting  the  different  pitfalls  which  be- 
set the  path  of  the  speculator,  and  suggesting 
a  means  of  avoiding  or  bridging  them,  it  is  felt 
that  a  thorough  understanding  of  such  dangers 
was  necessary  to  safety  and  maximum  good 
results. 

Fortified  with  a  knowledge  of  the  machinery 
of  the  speculative  world,  and  its  workings,  the 
trader  may  indulge  much  more  actively  in  his 
ventures  than  if  he  depended  wholly  upon  even 
the  most  excellent  judgment  of  intrinsic  value. 
Thus  the  trader  who  is  justified  in  believing 
general  or  individual  current  prices  to  be  at 
low  ebb,  may  act  boldly  and  frequently  with 
good  results.  He  enters  his  campaign  satisfied 
that  material  decline  is  improbable,  that  public 


CONCLUSION  143 

liquidation  is  complete,  and  that  the  next  im- 
portant move  will  be  upward.  He  brings  to 
bear  upon  his  operations  his  knowledge  of 
technical  conditions  and  natural  market  ac- 
tions, and  his  foundation  being  secure,  makes 
repeated  successes.  He  bears  constantly  in 
mind  the  fact  that  a  limit  will  eventually  be 
reached,  a  fact  which  is  easily  submerged  by 
undue  enthusiasm,  and  he  knows  that  it  is  far 
better  to  quit  too  soon  than  too  late. 

All  these  things  are  a  distinct  advantage  in 
increasing  profits  and  preventing  loss,  but  they 
are  of  secondary  importance.  They  are  the 
branches,  without  which  it  is  possible  for  the 
trunk  to  thrive,  but  which,  themselves,  will  die 
if  removed  from  the  parent  stem. 

The  great  basic  principle  of  speculation,  the 
foundation  upon  which  the  entire  structure 
rests,  is  the  recognition  of  value.  No  sustained 
success  is  possible  without  this  knowledge,  and 
most  failures  are  traceable  to  the  lack  of  it. 
Yet  so  generally  is  this  important  element  dis- 
regarded, or  refuted,  that  we  find  it  playing 
only  a  small  part,  or  no  part  at  all,  in  the  oper- 
ations of  the  average  speculator. 

In  the  speculative  world  we  find  many  men 
capable  of  clear  thinking,  correct  analysis,  and 
sound   business   judgment    falling   over    each 


144     THE  PITFALLS  OF  SPECULATION 

Other  in  the  rush  to  make  purchases  of  prop- 
erties of  which  they  know  nothing.  The  in- 
centive to  such  purchase  may  be  a  whispered 
tip,  or  contagious  enthusiasm,  and  the  ridicu- 
lous equation  of  luck  plays  no  inconsiderable 
part.    The  result  is  always  the  same. 

To  those  who  contend  that  all  the  obtainable 
knowledge  of  speculative  anatomy  is  limited 
and  unreliable,  let  this  fair  question  be  put : 

Was  there  ever  to  your  personal  knowledge 
a  period  of  speculative  extremes  where  all,  or 
most  of  the  appearances  and  conditions  herein 
detailed  did  not  exist  in  recognizable  form? 
To  be  more  specific,  when  the  public  favorite, 
U.  S.  Steel,  was  selling  at  its  lowest  prices  were 
not  the  technical  appearances  of  dullness, 
pessimism,  and  public  disgust  as  distinct  as 
the  activity  and  optimism  had  been  at  high 
prices?  And  furthermore,  were  not  the  figures 
by  which  an  intelligent  estimate  of  real  values 
and  probabilities  could  have  been  demon- 
strated in  the  face  of  claims  of  watered  stock, 
lack  of  demand,  and  general  decay,  always 
obtainable? 

It  was  stated  in  the  first  chapter  of  this  work 
that  the  maximum  result  obtainable  in  such  a 
treatise  would  be  the  direction  of  thought  into 
proper  channels.     The  theories,  and  even  the 


CONCLUSION  145 

established  facts  advanced  will  no  doubt  meet 
with  opposition  from  that  class  of  persons  who 
allow  a  general  denial  to  take  the  place  of 
answering  arguments,  and  who  sniff  at  theo- 
retical deductions.  Such  shallow  reasoners 
may  at  once  be  relegated  to  the  ranks  of  the 
numerous  whist  players  who  maintain  and  ex- 
press an  opinion  that  there  is  nothing  in  the 
"book  game,"  and  who,  in  the  face  of  over- 
whelming evidence  that  they  are  wrong,  go  on 
losing  games,  and  actually  take  pride  in  pro- 
claiming to  the  world  their  benighted  con- 
dition. 

Theories,  if  correct,  are  embryotic  facts,  the 
value  of  which  lies  wholly  in  their  proper  ap- 
plication, and  no  refutation,  of  even  a  faulty 
theory,  is  worthy  of  consideration  unless  ac- 
companied by  answering  argument. 

There  is,  however,  a  large  class  of  men  ca- 
pable of  clear  thought  and  sound  judgment 
who  speculate  unsuccessfully  through  allowing 
these  faculties  to  be  contorted,  or  lie  dormant 
before  the  apparent  mystery  enveloping  the 
affairs  of  the  bourse.  The  properly  directed 
exercise  of  the  capabilities  of  these  men  would 
soon  rob  the  speculative  arena  of  both  its 
mystery  and  its  bugbears,  and  resolve  it  into 


146     THE  PITFALLS  OF  SPECULATION 

a  place  of  business  where  extraordinary  oppor- 
tunities were  annually  presented. 

To  this  latter  class,  the  statements  and  de- 
ductions made  herein  are  respectfully  sub- 
mitted. 


INDEX 


Page 

ACCIDENTS 33 

Accidents:  As  a  bear  argument 33 

may  begin  great  upward  movement 34 

Accounts:  Illustrate  errors  of  speculation loi 

results  of  500  in  grain 115 

results  of  500  in  stocks 105 

Amalgamated  Copper:  What  investigation  would 

have  revealed 139 

American  Sugar  Refining  Co.:  Mr.  Keene's  op- 
eration in    98 

Assets,  railroad:  Consideration  based  on  earning 

ability , 135 

Atchison,  Topeka  &  Santa  Fe  Railroad:  Contrast 

of  thirty  years 130 

Bear:  Assists  in  downfall  of  prices 19,     29 

Bear  Points :  Accidents 31 

death  of  a  financier 37 

epidemic    38 

war    38 

Broker:  Choice  of  important 48 

opinions  of  given  too  great  credence 42 

Bull  period:  Marks  of  the  beginning 59 

reactions   and   shake-outs   in 60 

BUSINESS  METHODS  IN  SPECULATION      41 

Buying:  What  not  to  buy 125 

Chart   system:   Anomalies   of   applied   to   grain 

trading    122 

fatuous,  untrustworthy  and  dangerous 87 

theory   of  repetition 87 

Competition    decreasing    among    railroads    with 

concentration   of   capital 129 

CONCLUSION    141 

Corner:  Danger  of  to  short  seller. 97 


INDEX 

Page 
Decline:  Fixed  limit  of,  entitled  to  consideration    85 

following  death  of  R.  P.  Flower 36 

no  longer  due  to  savage  individual  attacks . .     98 
Dividend:  Payment  of,  not  safe  basis  of  value..   133 

Drawbacks:  In  short  selling 96 

Earnings:  Importance  of  study  of 134 

Epidemic :  A  bear  point 38 

Facilities:  Too  great  no  advantage 12 

Financier:  Death  of,  a  bear  point 37 

Flower,  R.  P.:  Causes  of  decline  following  his 

death     36 

Fortunes:  Few  made  on  short  side  of  stocks. ...     91 
Gambler:   The   "leader"   in   speculation   an   un- 
scrupulous one    74 

Gambling:    Chart    systems   make   speculation   a 

gambling  machine   88 

element  of,  in  speculation 6 

view  of  grain  transactions 122 

"Going  with  the  market":  Failure  of  in  specu- 
lative accounts    106 

Good   news:   Wall   Street   anticipates   and   dis- 
counts       16 

Gould,  Jay:  Anecdote  regarding  tip 69 

GRAIN  SPECULATION 113 

Grain:  Advantages  in  operations  on  the   short 

account  120 

anomalies  of  chart  system 122 

drawback  to  speculation  as  compared  with 

stocks    117 

examination  of  speculative  accounts 113 

gambling  view  of  transactions  in 122 

price  cannot  be  forecasted 116 

Greed:    Evidences    of    in    speculative    accounts 

examined   107 

IGNORANCE,  OVER-SPECULATION,  ETC.     15 

Ignorance:  Causes  loss  in  speculation 10-15 

traders  frequently  not  posted  on  facts 137 

Information  Bureaus:  Difference  between  tipsters 

and    reliable   service 75 

extravagant  claims   of  inside  information . .     74 

Investigation:   Ease   of   making 43 

Keene,  James  R.:  Operation  in  American  Sugar 

Refining  Co 98 

twice  worsted  in  grain  operations 123 


INDEX 

Page 

Leaders:  Danger  of  following  in  specularion . . .  72 
Listed   Securities:   Advantages   of  choosing  for 

operations   44 

classification  of  128 

Litigationij  Slight  danger  from  adverse 34 

Loss:  Attributed  to  erroneous  mental  operations  106 

causes   of    9 

greatest  speculative  10 

larger  in  grain  than  in  stocks 116 

Low-priced  stocks:  Exploitation  methods 127 

MANIPULATION   23 

Manipulation:  Methods  of  high  finance 24 

tactics  of  purely  speculative  interests 28 

two  classes  of  tactics  defined 23 

MARKET  TECHNICALITIES    51 

Market:  Advance  of  overbought  impossible....  51 

distance  from  an  advantage 108 

earmarks  of 11 

general  swing  marked  by  significant  appear- 
ances      58 

how  top  may  be  discerned 61 

material  decline  of  oversold  impossible ....  51 

method  of  unloading  at  the  top 62 

recognition  of  bad  technical  position 57 

signs  of  beginning  of  bull  movement. ......  59 

technicalities  of  51 

Margin:  Inadequate  leads  to  ultimate  failure...  46 

Mechanical   methods:    Explained 77 

not  an  interference  with  study  and  judgment  86 

useful  in  aid  of  previously  formed  judgment  78 

MECHANICAL  SPECULATION   77 

Mines:  A  certain  market  for  good 126 

Overspeculation:  Primary  cause  of  wide  varia- 
tions  in   prices 17 

Percentage:  Adverse  to  trader  trebled  by  per- 
sonal actions    106 

Profits:  Greatest  speculative 10 

Properties:  Examination  of  physical  and  finan- 
cial  conditions   necessary 137 

PUBLIC  ATTITUDE  TOWARD  SPECULA- 
TION    5 

Public :  Its  undoing  the  aim  of  manipulators ...  30 

participators  at  wrong  time 20 

too  large  a  following  not  desirable 29 


INDEX 

Page 
Public  Sentiment:   Experienced  speculators  op- 
erate in   reversion 19 

makes  new  security   a  favorite 132 

Railroad:    Assets    considered    only    as    earning 

ability    138 

Railroad   Securities:    Gradual  increase   in  value 

certain    izr; 

safer  than  industrials 129 

Reasoning:  Reversed  in  speculative  matters..  19,  28 

Repetition :    Theory    of 87 

Scale  order:  As  employed  in  accounts  analyzed.  105 

best  use  of 82 

explained  78 

extended  campaign  and  long  purse  called  for  81 

misuse  of 80 

Securities:  Rails  safer  than  industrials 129 

SHORT   SELLING   91 

Short  selling:  Continual  tampering  with  progress  97 

danger  of  corner 97 

earnings  and  enhancements  of  value  against 

the  trader   94 

extremely  hazardous  in  numerous  company  56 

few  good  traders  on  the  short  side 92 

not  as  profitable  as  supposed 91,  93 

popularity  founded  on  pessimism 91 

results  in  loss 11 

transactions  followed   95 

Speculation:   Ample   margin   required   by    good 

business  methods   46 

appearance  of  a  speculative  cycle 63 

attitude  of  public  toward 5 

business  methods  in 41 

danger  of  following  so-called  leaders 72 

essentials  of  business-like 47 

facts  applicable  to 9 

gambling  element  in 6 

general  ideas  the  reverse  of  truth 11 

individual  study  and  investigation  necessary  43 
manipulative  and  technical  conditions  to  be 

considered  137 

misleading  surface  appearance 20 

only   wide-spread   and   severe   disaster  can 

change  its  cycles 36 

public  participates  at  wrong  time 20 


INDEX 

Page 

requirements  of  successful 21 

safe  under  business  methods 12 

safest  course   100 

mechanical  methods  explained 77 

reasonable  basis  of 88 

recognition  of  value  its  basic  principle 143 

solid  groundwork  for  ventures 132 

systems  for  judging  changes  impossible...  10 

Stocks:  Low  priced  offered  to  public  at  about 

double  value  126 

wildcat  and  untried  should  be  eliminated.. .  125 

Stop-loss  order:  Theory  of 83 

SUGGESTIONS     AS     TO     INTELLIGENT 

METHODS    125 

Theory:  Postulates  of  the  author  in  this  work..  141 

Ticker:  Distorts  perspective  to  speculator 47 

most  useful  to  professional  scalpers 47 

Tip:  A  possible  stimulus  to  investigation 76 

anecdote  regarding  Jay  Gould 69 

as  analyzed  by  the  man  who  knows 76 

causes  abandonment  of  manipulative  plans . .  68 

disseminated  by  private  wire  houses 70 

founded  on  guesswork  or  invention 70 

frequently  more  or  less  correct 74 

illogical  character  of . ., 11,  67 

TIPS  67 

United  States  Steel:  Analysis  of  500  speculative 

accounts   in    104 

exemplar  of  methods  of  "high  finance" 24 

Value:    Determination   of 135 

recognition  of  the  basic  principle  of  specu- 
lation    143 

War:  A  bear  point 38 

reason  for  higher  prices  of  food  products..  120 

WHAT     500     SPECULATIVE     ACCOUNTS 

SHOWED    loi 


OTHER  VOLUMES  IN 

THE  INVESTORS'  LIBRARY 

UNIFORM  WITH  THE 

PITFALLS  OF  SPECULATION 


The  Art  of  Wall  Street  Investing,  by 
John  Moody.  This  attractive  little  book 
has  already  gained  a  national  reputation 
for  itself,  thousands  of  copies  having  been 
sold  within  the  past  year.  As  the  Wall 
Street  Journal  says,  "The  book  deals  in 
a  clear,  popular  and  entertaining  way 
with  the  methods  and  phases  of  Wall 
Street  investing,  giving  rules  for  analyz- 
ing railroad  securities  and  statements  and 
explaining  syndicates  and  reorganiza- 
tions." Many  bankers  in  New  York  and 
other  places  have  recommended  this  book 
highly  to  their  clients  and  it  is  experienc- 
ing a  steady  and  increasing  sale  in  all 
parts  of  the  country.  The  ten  chapters 
of  the  book  cover  the  following  subjects: 
Safety  and  Security;  Bonds  and  What 
They  Represent;  Stocks  and  What  They 
Are;  Analyzing  Railroad  Securities; 
Tractions  and  Industrials ;  Investment  vs. 
Speculation ;  Get-Rich-Quick  Schemes ; 
Reorganizations  and  Syndicates;  A  De- 
scription of  the  New  York  Stock  Ex- 
change; A  Description  of  Wall  Street 
Methods  in  General.  In  addition  to  its 
general  circulation,  the  book  has  already 
been  adopted  by  several  schools  and  col- 
leges as  a  textbook  in  departments  of 
finance,  commerce  and  economics. 


The  volume  is  attractively  printed  and  bound  in  red 
cloth,  being  uniform  in  size  with  the  other  volumes  of  The 
Investors'  Library.  Price,  if  sold  separately  from  the  set, 
$1  per  copy  net;  $1  JO  delivered. 


The  Cycles  of  Speculation,  by  Thomas 
Gibson.  This  work  is  framed  with  the 
intention  of  entering  a  little  further  into 
the  great  questions  of  speculation  and 
investment  than  did  "The  Pitfalls  of 
Speculation,"  by  the  same  author.  In  his 
letter  to  the  publishers,  Mr.  Gibson  says, 
"In  this  book  I  have  attempted  to  set 
forth  the  salient  points  which  appear  to 
be  the  most  generally  misunderstood  or 
unappreciated.  My  greatest  concern  has 
been  to  simplify  and  make  clear  such 
suggestions  as  are,  in  themselves,  ele- 
mentary, but  which  have  been  rendered 
complexed  and  confusing  by  too  much 
mystery  and  verlbiage." 

The  author  shows  that  the  successful 
speculator  requires  at  least  four  things:  a 
knowledge  of  values,  a  knowledge  of  gen- 
eral conditions,  a  knowledge  of  the  mach- 
inery of  speculation,  and  "something 
else."  Among  the  subjects  treated  in 
the  various  chapters  may  be  mentioned 
the  effect  of  the  gold  supply  on  prices 
of  securities  and  commodities ;  the  effect 
of  such  factors  as  politics,  crops  etc. ; 
Puts  and  Calls,  the  Question  of  Divi- 
dends, Effects  of  Business  Depression, 
Best  Methods  of  Trading,  etc. 


The  volume  is  attractively  printed  and  bound  in  bine 
cloth,  being  uniform  in  size  with  the  other  volumes  of  The 
Investors'  Library.  Price,  if  sold  separately  from  the  set, 
$1.50  per  copy  net;  $1.62  delivered. 


The  Investors'  Primer,  by  John  Moody. 
This  is  an  attractive  little  volume  and, 
because  of  the  field  which  it  covers, 
should  be  of  great  practical  value  to  the 
investor.  There  has  long  been  a  demand 
for  a  concise  handbook  of  this  kind  which 
would  give,  in  clear,  simple  language, 
definitions  of  all  important  terms  and 
phrases  employed  in  the  investment  and 
banking  business.  Following  an  inter- 
esting introductory  chapter,  which  em- 
braces a  general  outline  or  description  of 
the  American  investment  field,  the  book 
contains  alphabetically  arranged  defini- 
tions of  all  the  various  terms  and  phrases 
employed  in  the  financial  and  investment 
markets,  and  full  descriptions  of  the  en- 
tire mechanism  and  machinery  of  invest- 
ing. Among  the  subjects  which  are  here 
made  simple  and  clear  may  be  mentioned 
the  following:  Arbitrage  Trading,  Aver- 
aging, Bank  of  England  Rate,  Bank  State- 
ment, Bill  of  Exchange,  Borrowing  and 
Lending  Stocks,  Bucketing,  Foreign  Ex- 
change, Holding  Company,  Manipulation, 
Money  Market,  Privilege,  Pyramiding, 
Syndicate,  etc.,  etc.  In  addition  to  this, 
the  book  embraces  a  section  devoted  to 
descriptions  of  the  various  issues  of  pre- 
ferred and  guaranteed  stocks. 


The  volume  is  attractively  printed  and  bound  in  brown 
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Investors' Library.  Price,  if  sold  separately  from  the  set, 
$1.50  per  copy  net;  $1.62  delivered. 


Mining  Investments  and  How  to  Judge 
Them,  by  Francis  C.  Nicholas,  Ph.  D. 
An  attractive  handbook  of  about  two 
hundred  and  forty  pages,  covering  in  a 
most  entertaining  and  authoritative  way, 
the  whole  subject  of  mining  investments 
and  values  of  mining  stocks.  The  writer 
is  a  man  of  wide  experience  and  sound 
judgment  on  this  subject;  he  is  a  mining 
engineer  of  known  ability,  has  visited  all 
the  leading  mining  camps  of  the  world, 
and  has  of  recent  years  made  it  his  busi- 
ness to  ascertain  the  values  of  mines  and 
mining  ecurities  for  investment. 

The  book  contains  twenty-one  chapters 
and  gives  practical  reasons  why  most 
•mining  companies  fail,  and  also  shows  the 
conditions  under  which  they  ought  to 
succeed.  It  also  contains  chapters  on  the 
different  mining  camps  of  the  world,  and 
gives  much  practical  information  on 
modern  methods  of  mining,  with  many 
facts  showing  the  vast  growth  during 
recent  years  of  copper,  gold  and  silver 
production.  The  hook  is  one  of  permanent 
value  and  should  be  in  the  hands  of  every 
investor  or  intending  investor,  as  well  as 
the  bankers  and  brokers  who  serve  them. 


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$1  JO  per  copy  net;  $1.62  delivered. 


Moody's  Magazine 

The  National  Investors'  Monthly 

Edited  b^)  John  Moody 


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SUBSCRIPTION,  $3,00  PER  YEAR 
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Smith's 
Financial   Dictionary 

BY  HOWARD  IRVING  SMITH 


Recently  Issued 
Cloth.     543  Pages.     Price,  $4.50 


This  work  is  indispensable  to  a  bank  in  an- 
swering questions  that  daily  arise.  It  is  the 
only  Financial  Dictionary  published.  It  is 
more  than  a  Dictionary,  however;  it  is  like- 
wise an  Encyclopaedia.  It  describes  in  fullest 
detail,  in  clear  language,  Banking,  Money, 
Credit,  Securities,  Contracts,  Commercial 
Paper  and  other  Negotiable  Instruments, 
Domestic  and  Foreign  Exchange,  Speculation 
in  Stocks  and  Bonds,  Grain,  Cotton,  Coffee, 
Provisions,  etc.  It  is  a  complete  financial  li- 
brary in  itself. 

Smith's  Financial  Dictionary  is  adapted  not 
alone  for  banks  and  bankers,  but  for  corpora- 
tions, brokers,  exporters,  importers,  manu- 
facturers and  merchants,  and  also  for  lawyers. 
It  is  an  entirely  new  work,  consisting  of  543 
large  pages,  printed  from  clear  type,  on  supe- 
rior paper,  and  strongly  bound.  It  contains  no 
advertisements. 


Moody's  Magazine 

Book  Department 
35  NASSAU  STREET  NEW  YORK 


Thomas  Gibson's  Market  Letters 

THE  ADVISORY  SSRVICE  CONSISTS  OF 

1.— A  daily  letter  mailed  at  3.39  P.  M.  2.— A  weekly 
letter  covering  general  business  conditions,  crop  conditions, 
the  technical  situation  and  offerings  for  operations  during 
the  coming  \A^eek.  3. — A  special  letter  weekly  covering 
■whatever  topic  is  most  vital.  4. — A  special  letter  weekly 
on  crop  conditions  during  the  season.  5. — Analysis  of  the 
reports  of  leading  corporations  as  they  appear  6. — Monthly 
booklets  giving  prices  by  days  for  active  stocks.  7. — A 
monthly  booklet  of  charts.  8. — A  daily  table  of  average 
stock  prices  (Rails  and  Industrials).  9.— Occasional  tele- 
grams regarding  important  changes.  10.— Privilege  of  a 
reasonable  number  of  inquiries  by  mail  or  telegraph.  11. — 
A  quarterly  forecast  and  review. 

The  subscriber  to  this  service  may  rest  assured  that 
every  question  affecting  future  values  and  prices  of  securi- 
ties will  be  thoroughly  covered.  These  letters  deal  par- 
ticularly with  securities.  Grain  and  Cotton  are  also  briefly 
touched  touched  on.  "While  the  most  dependable  opinions 
on  commodities  are  olTered,  the  advice  is  not  based  on  per- 
sonal investigation. 

THE  PRICE  OF  THE  SERVICE  IS  AS  FOLLOWS 
COMPLETE  SERVICE        S  =-°^  rn°nth 
AS  DETAILED  ABOVE    ^  !„ eTear  .' 

COMPLETE  SERVICE  (One  month 

(EXCEPT  DAILY  LETTER)  j  One"  ear 

STATISTICAL  DEPARTMENT 

This  department  is  under  the  direction  of  the  best 
statistician  available.  Every  corporate  report  is  examined 
and  analyzed  as  soon  as  it  appears.  The  statistical  li- 
brary is  complete  and  up  to  date.  Bulky  and  involved 
reports  are  boiled  down  to  cover  concrete  and  salient  facts. 

Digests  of  the  conditian  of  any  security  listed  on  the 
New  York,  Boston  or  Philadelphia  exchanges  will  be  fur- 
nished at  $2.C0  each.  Reports  involving  unusual  research 
will  be  charged  at  fair  prices.     Estimates  on  application. 

This  department  is  prepared  to  compile  statistical 
matter  of  any  kind  on  short  notice.  The  accuracy  of  such 
dompilations  is  guaranteed.  State  what  you  want  and 
estimate  will  be  furnished. 

THOMAS  GIBSON 

CORN  EXCHANGE  BANK  BLDG.,  NEW  YORK 


$10.00 
40.00 
75.00 

$5.00 
20.00 
35.00 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 

This  book  is  DUE  on  the  last  date  stamped  below. 

RECT)  ID-Uni- 


nis 


^R  U  1985 


^''  ^  h^ 


1988 


47584 


3  1158  01014  7444 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA    001  204  942    5 


OR  HSNHV  OOLDMAN 
''INE  BOOKS 
'03  1-2  w  «TH  ST. 
J-OS   ANOKLES 


